February 7, 2020

Investors Continue to Favor Fixed Income Funds in 2020

by Tom Roseen.

For the Lipper fund-flows week ended Wednesday, February 5, 2020, investors continued to pad the coffers of taxable bond funds (including ETFs), injecting a net $7.0 billion for the group’s fifth consecutive week of net inflows. Taxable bond funds have witnessed nine consecutive weeks of plus-side performance, returning 0.15% during the most recent flows week. Year to date, the group has already attracted a whopping $65.6 billion, with conventional taxable bond funds attracting $47.7 billion and taxable bond ETFs taking in $17.9 billion.

The corporate investment-grade debt funds (+$41.6 billion) macro-group attracted the lion’s share of net new money year to date, with conventional corporate investment-grade debt funds attracting some $33.2 billion and their ETF counterparts drawing a net $8.4 billion.

The macro-group is made up of nine different Lipper classifications: Alternative Credit Focus Funds, Core Bond Funds, Core Plus Bond Funds, Corporate Debt BBB-Rated Funds, General Bond Funds, Loan Participation Funds, Short Investment Grade Debt Funds, Short-Intermediate Investment Grade Debt Funds, and Ultra-Short Obligations Funds.

Much like in 2019, Core Bond Funds (+$20.1 billion) have attracted the largest net inflows year to date of the Lipper classification found in the macro-group, followed by Ultra-Short Obligation Funds (+$7.6 billion) and Core Plus Bond Funds (+$7.2 billion). While on the equity side of the equation investors appear to favor ETFs over conventional mutual funds, fixed income investors appear to still favor mutual funds, with conventional Core Bond Funds attracting $15.9 billion in net inflows while their ETF counterparts took in just $4.2 billion.

In contrast, while the headline figure shows equity funds (including ETFs) have attracted a net $5.7 billion year to date, conventional equity funds handed back $32.7 billion so far this year while their ETF cousins took in a net $38.5 billion. This is a pattern we have seen over the last few years. On the conventional fund side, the pariah of the equity funds group was large-cap funds, which suffered net redemptions of $30.4 billion. Meanwhile on the ETF side of the equation, large-cap ETFs took in a net $22.1 billion year to date.

However, the dichotomy is not so strong when looking at Lipper’s international funds macro-group (+$17.9 billion). For this group, conventional international equity funds have attracted $7.5 billion, while international equity ETFs took in $10.4 billion.

While several pundits have pointed to investors’ preference for low-cost, passively managed products over actively managed products as the cause of the migration from conventional equity funds to ETFs, I think there might be an additional explanation.

Over the years, Baby Boomers allocated larger sums of their savings to the core segment of their core and satellite portfolio design, which was heavily weighted toward a diverse large-cap stock allocation. Now those same investors are reallocating more heavily to what was once the satellite portion of their portfolio from their core allocations (primarily actively managed large-cap funds)—fixed income funds, sector funds, international funds, and the like—leading to the large exodus from conventional large-cap funds.

In our Q4 Mutual Funds and Exchange-Traded Products Snapshot, we showed that total assets under management for actively managed domestic equity funds (+$5.237 trillion) and passively managed domestic equity funds (including ETFs) (+$5.418 trillion) were close to parity, supporting the idea that investors have allocated equal amounts to passively and actively managed domestic equity funds. However, we are still seeing heavier allocations to actively managed funds by total assets under management to the other major macro-groups below. That said, 2019 flows did show a trend toward greater flows into some of the passively managed groups as well.

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