American Funds' inflows are "all the more impressive" because other active funds are losing assets, Morningstar said.

American Funds has overtaken Fidelity to become the second-largest fund family after Vanguard, according to Morningstar’s latest fund flows report.

“Consistent inflows for American Funds and outflows for Fidelity prompted a reversal in the top 10 this month, with American Funds climbing to the second spot and Fidelity dropping to the third,” said research analyst Alina Lamy, in a report released Monday.

“American Funds and Vanguard were the only firms with sizable inflows on the active side in April. Vanguard, iShares, [Dimensional Fund Advisors] and Fidelity enjoyed inflows on the passive side,” Lamy explained.

In April, Vanguard’s net inflows totaled $3.4 billion, while American Funds picked up $1.5 billion in net flows. Meanwhile, Fidelity had outflows of $3.7 billion.

For the past 12 months, Vanguard has attracted more than $15 billion in fund assets vs. Fidelilty’s loss of $28.5 billion. Meanwhile, American Funds has drawn $5.2 billion for the year ended April 30, according to Morningstar.

“Although recent inflows are still nowhere near its pre-crisis glory days, American Funds has made a skillful comeback, all the more impressive because it’s happening at a time when most active funds (especially equity ones) are in a world of pain,” Lamy said.

American Funds’ success, she says, is all about cost.

“Eighty-two percent of its funds are in the low or below-average fee level, meaning least expensive (in the bottom two quintiles in terms of cost),” the analyst stated. “And in terms of performance, American Funds American Balanced (ABALX), which appears on the top-flowing list this month, beat out 97% of its peers in the allocation 50%-70% equity Morningstar category in the past year.” 

Plus, although American Funds has been known for its equity products, its bond funds are taking center stage today: The Bond Fund of America (ABNDX) and Intermediate Bond Fund of America (AIBAX) drew $334 million and $213 million, respectively, in April, “indicating that American Funds is joining the battle for investors’ fixed-income money,” Lamy points out.   

As for the top individual funds in April, as measured by flows, the Metropolitan West Total Return Bond fund came in No. 1 in the active category with $1.7 billion, followed by the PIMCO Income Fund, DoubleLine Total Return Bond Fund and others.

In the passive group, Vanguard topped the charts with the Total Bond Market Index Fund (up $2.8 billion), Total Stock Market Index Fund (up close to $2.8 billion) and three other products.

The list of those at the bottom in the active group, or the worst performers in terms of flows, included the PIMCO Total Return Fund (-$1.1 billion) and Ivy Asset Strategy (-$1.1 billion). On the passive side, the PowerShares QQQ ETF saw outflows of $3.2 billion.

Fund Preferences

Investors are pulling out of active equity funds and moving more money into fixed income, the latest fund-flow tallies from Morningstar also show.

In April, some $24 billion was pulled out of active U.S. and international equity funds. On the passive side, though, nearly $13 billion moved into these investments.

On the fixed income side, investors pumped some $11.7 billion into actively managed taxable bond funds, while adding $11.1 billion to similar passive products.

Across the spectrum of Morningstar categories, about $11 billion was withdrawn from active long-term funds vs. inflows of $26.5 billion in to passive products.  

“Recent economic and market news has been mixed,” said Lamy. “The U.S. stock market has recovered somewhat after its January and February losses, but not enough, it seems, to drive investors back to equities.”

Investors are less interested in international-equity diversification compared to last year, Lamy says: “In times of uncertainty, investors are turning to the asset class that offers moderate risk and at least some return (and also a fairly certain income stream): fixed income.”

— Check out Low Mutual Fund Fees Predict Higher Returns: Morningstar on ThinkAdvisor.