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Passive Beats Active in August Fund Flows: Morningstar

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Long-term mutual funds and exchange-traded funds attracted $32.6 billion in investor assets in August, according to Morningstar. These flows were driven by strong demand for international-stock funds and “resurgent demand for fixed income,” a report released Wednesday said.

“Funds focused on U.S. equity suffered a $4.1 billion outflow, dragged down by active U.S. equity funds, which suffered their sixth straight month of outflows,” explained Michael Rawson, an analyst with the Chicago-based research group.

Overall assets in long-term mutual funds and ETFs, excluding money markets and funds of funds, hit $13.9 trillion. (Schwab/Laudus funds are not included in the tallies.)

“While the majority of those assets are invested in actively managed funds, the stronger flows to passive investments is reflected in their 11% organic growth rate compared with just 2% growth for active funds during the past year,” stressed Rawson.

This month’s data, for the first time, includes both mutual funds and ETFs. It also breaks out passive and active investments.

Morningstar says its decision to include ETFs and to split some data stemmed from the fact that ETFs now account for “a significant share” of fund assets and flows.

“In addition, a large share of the flows to mutual funds during the past several years [has] gone to passive investments, often within retirement savings accounts. These flows may not be completely representative of incremental investment decisions,” the research organization noted.

Big Three

Vanguard continues to dominate flows through the strength of its passive lineup of mutual funds and ETFs, Morningstar says.

“In a difficult environment for active funds, Vanguard’s $7 billion inflow during the past year is admirable, ranking 14th among active fund providers,” Rawson added.

Morningstar added that a major source of Fidelity’s outflows during the past year has been conversions to collective investment trusts. “However, it is surprising that these outflows are not being offset by organic inflows,” it said.

The top three fund families, as measured by assets (excluding money markets and funds of funds) are Vanguard with $2.57 trillion, Fidelity with $1.24 trillion and American Funds with $1.18 trillion. Blackrock is catching up with $943 billion, and PIMCO trails the top four with $519 billion.

Bond Bets

While 2013 saw the start of “a great rotation” from bonds to equities after the Fed hinted at lower monetary stimulus, nobody “could have forecast how fast that rotation would fizzle out,” Rawson explained in his latest report.

Through August 2014, taxable bond funds have drawn $99 billion as interest rates have fallen. In contrast, U.S. equity funds’ inflows have totaled $3.5 billion in the same period.

“Taxable bond fund flows have exceeded U.S. equity fund flows every month this year. The bright spots for equities have been international and sector funds, which have brought in $119 billion and $39 billion, respectively,” according to Morningstar.

Flows to intermediate-term bond funds have “rebounded sharply” during the past six months, the research firm points out, excluding the PIMCO Total Return Bond (PTTRX) fund.

PIMCO’s flagship fund saw outflows of nearly $4 billion in August. the 16th consecutive month that investors had pulled assets out of Bill Gross’ mutual fund, which has a Morningstar analyst rating of gold.

Other active intermediate-term bond funds that are poised to take market share from PIMCO, the research firm says, are the gold-rated Metropolitan West Total Return Bond (MWTIX), silver-rated T. Rowe Price New Income (PANIX), gold-rated Dodge & Cox Income (DODIX) and the not-ratable DoubleLine Total Return Bond (DBLTX).

Some funds with notable flows in August are the silver-rated MFS International Value (MGIAX) and the silver-rated T. Rowe Price New Income (PRCIX).

The neutral-rated BlackRock Strategic Income Opportunities (BSIIX) gained $953 million in new cash last month, though flows to other popular non-traditional-bond funds slowed.

The gold-rated Dodge & Cox International Stock led all active funds in the international stock category group with $770 million of inflow, says Morningstar.

Funds & Net Worth

Pointing to market appreciation, Morningstar also said Wednesday that mutual funds now account for a larger share of household net worth than a year ago.

“Based on Federal Reserve data, households and nonprofit organizations hold $7.1 trillion in mutual funds, excluding money market funds,” said Rawson and his fellow analyst Kelsey Tsai. “This represents 8.6% of household net worth.”

Still, the researchers said, pension entitlements ($19.8 trillion), corporate equity ($13.5 trillion), real estate equity ($10.8 trillion), non-corporate equity ($8.8 trillion) and bank deposits and currency ($8.7 trillion) make up a larger share of household net worth than mutual funds.

Mutual fund assets are growing faster than these other categories, however.

Check out Gene Fama: When’s the Right Time for Active Investing? Never on ThinkAdvisor.


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