September 15, 2011

August Fund Outflows: Worst Since Late ’08

Outflows from funds and ETFs were more than $32 billion, according to Morningstar and Strategic Insight

Estimated outflows from long-term mutual fund and exchange-traded fund assets were $32.5 billion in August, double the amount in July and the most “severe mutual fund outflows since November 2008,” according to a Morningstar report released Wednesday.  

In the same period, U.S. ETFs collected assets of $947 million, following inflows of $17.2 billion in July; ETFs have realized only a one month of outflows in the past year, the Chicago-based research group says.

A competing research firm, New York-based Strategic Insight, says outflows were even greater than Morningstar’s estimates due to extreme volatility in the markets. “In an unusually volatile month, nervous investors redeemed an estimated $34 billion in net cash out of U.S. stock and bond mutual funds in August 2011 (in open-end and closed-end mutual funds, excluding ETFs and funds underlying variable annuities),” the group said in its Wednesday news release.

August was the third-consecutive month of net outflows from long-term funds, after net outflows of $16 billion in July, according to Strategic Insight.

“Fund shareholders were clearly shaken by a dramatic month,” SI said in a press release. “August started with a protracted political fight over the federal government’s debt ceiling, capped by Standard & Poor’s decision on Aug. 5 to downgrade the U.S.’s long term credit rating from AAA to AA+. The S&P 500 index ended August down 5.4%, but experienced extreme declines and rebounds along the way.”  

Morningstar’s Analysis

Despite the recent volatility, U.S.-stock outflows fell to $15.5 billion during the month after redemptions of $22.9 billion in July, Morningstar says. However, risk aversion spread to fixed income, as investors pulled $12.0 billion from taxable-bond funds in August. Bank-loan and high-yield bond funds were hardest hit, the research firm says, with outflows of $7.3 billion and $5.1 billion, respectively.

Investors sought refuge in money-market funds, which saw inflows of $74.8 billion, says Morningstar (MORN). This was the biggest monthly inflow for such funds since January 2009, and partially reversed June and July’s combined $150.0 billion in outflows, the group adds.

Meanwhile, modest outflows continued for international-stock and balanced funds in August, which had respective outflows of $2.9 billion and $2.3 billion.

U.S. stock ETFs, which typically drive overall ETF flows, experienced inflows of less than $400 million in August, while international-stock ETFs lost $5.5 billion during the month. This was the greatest outflow for any ETF asset class, and it marked the largest monthly net redemption for international-stock ETFs in the past three years, Morningstar reports.

Taxable-bond offerings added $4.3 billion in August and had greater inflows than any of the other ETF asset classes during the month.

Despite rising gold prices, commodities ETFs experienced outflows of nearly $2.0 billion.

Strategic Insight’s Conclusions

Equity mutual funds saw a surge in net outflows in the second week of August, the group says, but then net outflows slowed to a pace more in line with recent months’ activity.

“Our research over the past two decades shows that redemption spikes after stock market declines tend to be limited in scope and short-lived,” said Avi Nachmany, SI’s director of research, in a press release. “However, continuing doubts about the U.S. economy and the European sovereign debt problems  are reducing investors’ appetite for equity risk.”

Equity mutual funds had net outflows of $23 billion in August, compared with net outflows of $24 billion in July, explains SI. U.S. equity mutual funds saw net outflows of $21.4 billion in August, and international/global equity funds saw net outflows of $1.4 billion.

Meanwhile, bond mutual funds had net outflows of $11 billion, compared with net inflows of $8 billion in July. Taxable bond funds experiences net outflows of $10 billion, and muni bond funds experienced net outflows of $1 billion.

“Leading the way in net outflows were floating-rate and high-yield bond funds, both of which are sensitive to fears of a recession,” the SI report stated. “The bright spots were corporate short- and intermediary-maturity bond funds, which together took in $6 billion in positive flows as some investors continued to search for alternatives to low-yielding cash vehicles.”  

Money-market funds had net inflows of $69 billion in August, benefiting from a flight to safety, concludes SI. This was a reversal from July, when money funds had net outflows of $113 billion. In the first eight months of 2011, money funds experienced total net outflows of $183 billion.

“Bond funds’ net flows seemed to turn positive at the end of August,” said Nachmany. “Given the expectation of continued volatility and the Federal Reserve’s intention to keep interest rates extremely low, demand for select bond funds should rebound.”  

In terms of ETFs, Strategic Insight says they had nearly $1 billion in net inflows, led by large-blend ETFs (nearly $5 billion in inflows), leveraged ETFs ($3 billion) and ultra-short maturity bond ETFs ($2 billion); Diversified emerging markets ETFs saw the biggest net outflows (nearly $2 billion).

Through the first eight months of 2011, ETFs (including ETNs) saw net inflows of $89 billion, “a pace that could still produce the fifth-straight year of $100 billion or more in inflows to ETFs,” according to SI. At the end of August 2011, U.S. ETF assets stood at $1.06 trillion.

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