by Tom Roseen.
While U.S. December inflation figures (6.5%) declined significantly from their top in June (9.1%), the combination of higher prices, rising interest rates, and geopolitical concerns weighed on investors’ wealth creation over the course of the year.
During 2022, the Federal Reserve raised the fed-funds rate seven times, including four consecutive increases of 75 basis points (bps), shifting the interest rate range from 0% to 0.25% up to 4.25% to 4.50%—a 15-year high. This had a significant impact on both equity and fixed income returns, which from a historical perspective were usually not very highly correlated—not true for 2022.
The average equity and taxable fixed income mutual funds (including ETFs) suffered their largest one-year losses since 2008 and on record dating back to 1974, respectively, declining 16.82% and 8.54%. For the year, on the equity side, the commodities funds (+8.04%) macro-group posted the strongest plus-side returns, while the world equity funds macro-group was the equity funds’ pariah (-19.59%).
On the taxable fixed income side, Lipper’s taxable money market funds macro-group posted the strongest one-year plus-side return—gaining 1.35% for 2022. The general U.S. government and Treasury funds (-12.97%) and world taxable fixed income funds (-12.79%) macro-groups suffered the largest declines.
Tax-exempt fixed income funds also suffered outsized losses, with the average municipal bond fund declining 9.12% for 2022, their largest one-year loss since 1980. The single-state (+0.83%) and general tax-exempt money market fund (+0.84%) macro-groups posted the only plus-side returns of the group. In comparison, the High-Yield Municipal Debt Funds classification (-13.43%) posted the largest one-year loss, bettered by New York Municipal Debt Funds (-11.36%).
Assets under management for the U.S. fund business (including conventional funds and ETFs) declined $5.5 trillion for the year, from $34.749 trillion on December 31, 2021, to $29.223 trillion at year end 2022. The lion’s share of these declines can be attributed to market losses highlighted above.
There are two primary components that help us describe the change in a fund’s total net assets (TNAs) from one period to the next: performance and fund flows (shareholder purchases, redemptions, and exchanges). For the one-year period ended December 31, 2022, investors were net sellers of fund assets (including those of conventional funds and ETFs), withdrawing a net $499.3 billion.
The taxable bond funds macro-group (including ETFs) suffered the largest net redemptions for the year, handing back a net $237.3 billion—its largest one-year net redemption on record dating back to 1992, when Lipper began tracking weekly net flows, followed by municipal bond funds (-$125.4 billion), equity funds (-$90.6 billion), and money market funds (-$46.0 billion).
However, as we have highlighted in the past, there is a stark contrast between the estimated net flows for conventional mutual funds and ETFs. Conventional mutual funds suffered net redemptions of $982.1 billion in 2022, with equity funds (-$395.3 billion) suffering the largest outflows, followed closely by taxable bond funds (-$388.5 billion), municipal bond funds (-$152.2 billion), and money market funds (-$46.0 billion).
For the year, the gold and natural resources funds macro-group attracted the largest amount of net new money in the conventional equity funds group—taking in a measly $708 million—while large-cap funds (-$118.0 billion) handed back the largest net redemptions.
In contrast, ETFs took in $482.8 billion for the year, with equity ETFs taking in a net $304.7 billion, followed by taxable bond ETFs (+$151.2 billion) and municipal bond ETFs (+$26.9 billion). So, investors’ shift to generally passively managed, tax-efficient exchange-traded products continued.
For 2022, the large-cap ETF (+$181.4 billion) macro-group was the primary attractor of investors’ assets in the equity space, followed by equity income ETFs (+$74.5 billion) and international equity ETFs (+$ 53.9 billion), while sector-finance/banking ETFs (-$16.0 billion) saw the largest net redemptions.
Whereas, on the taxable bond fund side, the government-Treasury ETF macro-group took in the largest draw in the space—attracting $92.6 billion—followed by corporate investment-grade debt ETFs (+$46.2 billion), while corporate high-yield ETFs (-$7.3 billion) suffered that largest net redemptions for the year.
While conventional municipal bond funds handed back a record one-year amount of $152.2 billion for 2022 (their largest one-year net outflows since at least 1992), their ETF counterparts took in a net $26.9 billion for the year (their largest one-year net inflows dating back to 2007, when the first municipal bond ETF was created). This is quite a change from days past when investors preferred actively managed municipal bond fund offerings over their passively managed counterparts.
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