December 10, 2021

Investor Focus on Inflation Drives Year-End Flows

by Tom Roseen.

With inflation continuing to rear its ugly head—transitory or not—market participants have pushed inflation-related mutual fund classifications to the top of the charts in 2021 so far. However, lofty stocks prices, concern about the omicron variant of COVID-19, and increasing market volatility have kept some investors in check. Many individuals are continuing to favor fixed income funds and ETFs by injecting $465 billion of net new money year to date into the group over equity funds and ETFs (+$349.8 billion).

And while the average equity mutual fund has returned a handsome 14.83%, taxable and tax-exempt fixed income funds are up just 0.21% and 1.86%, respectively, year to date.

No typo—all of Refinitiv Lipper’s municipal bond fund classifications have posted plus-side YTD returns through the week ended December 9, 2021, while the taxable fixed income funds group was dragged down by Emerging Markets Local Currency Debt Funds (-8.24%), International Income Funds (-4.93%), and General U.S. Treasury Funds (-3.34%)—highlighting only the largest losers.

Nonetheless, on the taxable fixed income fund side, while Core Bond Funds (aka corporate investment-grade debt funds) continue to be the top attractor of investors’ assets, Inflation Protected Bond Funds (and ETFs) have jumped to the number two position. They took in $68.4 billion year to date, followed by Short Investment-Grade Debt Funds (+$57.9 billion), Multi-Sector Income Funds (+$49.4 billion), and Loan Participation Funds (+$43.1 billion).

Net flows into Inflation Protected Bond Funds (+$68.4 billion) are a record amount stretching back to 2002 when Lipper created the classification, while the next largest calendar-year net inflows for the classification occurred in 2009 (+$26.5 billion). YTD net inflows for Loan Participation Funds (+$43.1 billion)—another favorite to hedge against rising interest rates—are the second largest on record for any full year, only surpassed by those in 2013 (+$62.9 billion).

From a return perspective, taxable fixed income investors have bid up inflation-related and high yield issues, while punishing nondomestic and longer dated Treasury funds, with Lipper’s Inflation Protected Funds classification posting the strongest YTD returns of 4.58%, followed by High Yield Funds (+4.37%), Loan Participation Funds (+4.14%), and Short High Yield Funds (+3.73%).

And despite strong equity returns YTD, investors have shunned conventional equity funds—redeeming $213.6 billion this year—while they have embraced equity ETFs, injecting a net $563.4 billion year to date. And while some might assume that gold-related funds and ETFs would be attractors of investors’ assets as a hedge against inflation, that is not the case. Combined, Precious Metal Equity Funds (goldminers and the like) and Commodities Precious Metals Funds, both including ETFs, have suffered net redemptions of $11.9 billion for the year thus far.

Recent rallies around those sectors that are impacted by inflation, however, have led to strong returns in select classifications on the equity side, with Commodities Energy Funds (including ETFs) posting the strongest YTD returns (+58.38%), followed by Natural Resources Funds (+47.66%), Global Natural Resources Funds (+31.52%), and Equity Leverage Funds (+29.87%).

However, with the increased volatility in equity markets, investors have shied away from making focused bets, generally injecting money into nondomestic equity funds and ETFs, broad-based index-related products, and some sector-equity plays, with international equity funds (and ETFs) attracting the largest amount of net new money YTD, taking in $130.9 billion, followed at a distance by large-cap funds (+$60.8 billion), equity income funds (+$36.5 billion), small-cap funds (+$30.4 billion), and sector-technology funds (+$25.0 billion).

With investors continuing to wonder about proposed changes to the tax code to cover the ballooning U.S. fiscal deficit and new proposed spending by Congress and the current administration, municipal bond funds have attracted some $93.7 billion YTD, just shy of the record set in 2019 of $96.5 billion, with a few weeks left to possibly break that high.

As with the taxable fixed income universe, investors continued their search for yield on the tax-exempt side of the equation, injecting the largest sum of net new money YTD into General & Insured Municipal Debt Funds ($31.9 billion) and High Yield Municipal Debt Funds (+$21.7 billion), which were followed by Intermediate Municipal Debt Funds (+$16.6 billion) and Short/Intermediate Municipal Debt Funds (+$13.2 billion).

The two primary attractors of investors’ assets on the tax-exempt side also produced the two strongest returns of the macro-group, with High Yield Municipal Debt Funds (+5.35%, outpacing their taxable counterpart) posting the strongest returns of the group, while General & Insured Municipal Debt Funds returned 2.13% and took the number two spot on the leaderboard. All of the 20 classifications warehoused in Lipper’s tax-exempt fixed income funds universe posted plus-side returns year to date.

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