Conventional Equity Fund Investors Testing the Water in March 2021

Over the last few months, we have commented on the rotation out of the high-flying tech and stay-at-home stocks and into more cyclically focused issues that will benefit from an improvement in economic conditions as we approach a more normal semblance of life as we have known.

Improving COVID-19 vaccine distributions, a third round of economic stimulus recently signed into law by President Joe Biden, and the Federal Reserve Board committing to keep interest rates low until 2023 broadened the most recent market rally—pushing the Dow into record territory—closing above the 33,000 mark for the first time and witnessing its fastest 1,000-point rise on record. Meanwhile in the prior week, investors had sent the NASDAQ Composite into correction territory.

With the broadening of the recent rally, we have seen equity mutual fund investors begin testing the waters once again. While equity ETFs (+$16.2 billion) continued to attract net new money during the Refinitiv Lipper fund-flows week ended Wednesday, March 17, 2021, chalking up their thirteenth week of net inflows in 14, conventional equity funds (+$2.1 billion during the most recent week) registered just their sixth week of net inflows over the same period. This week’s inflows were the group’s largest since April 1, 2020.

Estimated net flows into conventional funds and ETFs remain very lopsided year to date for 2021, with conventional equity funds handing back some $79.7 billion, while their ETF counterparts attracted $144.3 billion. However, in line with the rotation view, we do see some bright spots in the conventional equity funds space.

In 2020, conventional equity funds witnessed net redemptions in 49 of 52 weeks, suffering $541.4 billion in net outflows (a record amount for any given year), with large-cap funds (-$311 billion) handing back the largest net redemptions of the group, bettered by international equity funds (-$138.1 billion) and small-cap funds (-$37.3 billion), as conventional fund investors flocked to taxable bond funds (+$120.1 billion) and money market funds (+$662.4 billion). In contrast, equity ETFs took in $196.7 billion in 2020, while taxable bond ETFs attracted $178.8 billion.

After such a dismal showing in 2020, the recent uptick in flows for March in the conventional equity fund space is encouraging. Some of this money has most likely been sitting on the sidelines in employer sponsored qualified plans. While large-cap funds have continued to see outflows for the month-to-date period, most of the other macro-groups have been attractors of investors’ assets, with international equity funds (+$4.2 billion) taking in the largest draw of net new money, followed by small-cap funds (+$1.6 billion), global equity funds (+$1.5 billion), equity income funds (+$837 million), and the commodities-focused sector-other funds (+$559 million).