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Bond Outflows, Equity Inflows Strong in Late 2014: Morningstar

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Morningstar’s estimated fund flows for December indicate that the final month of 2014 resembled prior months. Actively managed U.S. equity funds experienced outflows, though the level diminished from November, while passive-equity funds had inflows.

For the full year, active U.S. equity funds lost nearly $98.5 billion, and their passive counterparts received over $166.5 billion, according to a report compiled by Alina Lamy, a senior markets-research analyst for the Chicago-based group. (The figures include asset flows into both traditional mutual funds and ETFs.)

Actively managed taxable bonds were “heavily impacted by PIMCO-related events during the last few months of the year,” Lamy explained. In December, investors withdrew some $23.0 billion from the category.

For the full year, passive flows surpassed active ones for all equity category groups, the research firm says, as well as for taxable bonds. Still, investors favored active management in some other categories, like allocation, municipal bond and alternative funds.

Active-U.S. equity funds had outflows for the 10th-consecutive month, while passive-U.S. equity funds saw inflows for the 11th-consecutive month. “In fact, when stepping away from monthly numbers and looking at cumulative flows during the past three years, the pattern is becoming even more evident, with passive U.S. equity surpassing all other equity categories and active U.S. equity on the decline,” Lamy noted.

International-equity funds continued to receive inflows in December, though diversified emerging-market funds had some outflows. Overall, international equity funds have done well on both the active and passive side, she adds; however, passive funds experienced higher cumulative flows.

Fixed Income

Active taxable bonds were still in negative territory in December, “after months of large PIMCO-driven outflows (except a small inflow in November),” the Morningstar analyst said. “These outflows may not be representative of the category in general, but they certainly go a long way to show how diminished investor confidence can have far-reaching repercussions.

Passive taxable-bond funds, on the other hand, had their 13th consecutive month of inflows.

It’s worth remembering that from 2009 to 2012, fixed-income funds were in favor with investors due to the flight-to-safety trend following the 2007–2008 financial crisis. Investors only regained confidence in equities in 2013, when flows into both U.S. and international-stock funds exceeded those into fixed-income products.

“Flows were fairly balanced in 2014, with international-equity funds leading the way and U.S. equity funds not far behind,” Lamy explained. Lately, investors have preferred passively managed U.S. and foreign large-blend funds, rather that funds focusing mainly on growth or value.

In late 2014, uncertainty in U.S. interest rates likely caused outflows from high-yield-bond, bank-loan and short-government funds. Concerns over the international economic climate, oil prices, a stronger dollar and the situation in Russia appear to have steered investors away from emerging-market funds, Morningstar reports.

Fund Families

Vanguard’s passive funds had inflows of nearly $29 billion in December and $201 billion in 2014. Its passive funds experienced $556 million of inflows in December and some $18 billion for the year.

JPMorgan’s active funds attracted roughly $4.9 billion in flows in December and $28 billion for the past 12 months. Its passive funds, however, had outflows of $127 million in December and $288 million in 2014.

PIMCO had estimated outflows of about $27 billion in December and $150 billion for 2014 on the passive side, as well as outflows of $399 million in December and $415 million for the full year on the active side.

As for the pace of flows into passive funds, “SPDR State Street Global Advisors almost caught up with Vanguard in December, though, as its SPDR S&P 500 ETF SPY received the largest inflow among passive funds for the second month in a row,” explained Lamy.


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