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Investors Showed Major Risk Aversion in 2018

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Asset flows followed by Morningstar in 2018 showed one powerful reality: Investors have become risk-averse in a big way.

In fact, Morningstar found in its Direct Asset Flows Commentary that long-term U.S. funds had their greatest outflows since October 2008, and inflows for the year were the lowest since 2008. This later fact “jumped out” at Kevin McDevitt, senior analyst for Morningstar and author of the report.

Further, December outflows, which mostly came from actively managed funds, were a record $143 billion.

“Money flowing out of active funds is not new, but the massive outflow in December is striking,” McDevitt told ThinkAdvisor. “$143 billion is a huge number, largest we’ve seen.”

The outflow could be for a combination of reasons, he said: “Fear might be driving it, but people are moving from active to passive funds … that’s secular,” but other factors include tax-loss selling and investors wanting to avoid big capital gains.

Other findings by McDevitt and team show that taxable-bond funds had $43 billion in outflows in December, their greatest since June 2013, which indicates to McDevitt “how risk-averse people have gotten.”

Investors continued to cut credit risk and “seek shelter among high-quality, short-duration vehicles,” the paper noted. Further, intermediate bonds were hit the hardest with $17 billion in outflows, the Morningstar category’s worst month since August 2013, the paper stated.

The big winner was money market funds, with inflows of $57 billion, its best year since 2008. Also, passive funds “generally gained at their active counterparts’ expense, though perhaps not to the degree expected,” McDevitt wrote. Passive funds saw almost $60 billion in inflows.

And though active funds saw $301 billion in outflows for the year, active ETFs continued to grow, having their strongest year yet with $27.8 billion in inflows. In addition, in December, international equity, sector equity, and alternative funds all had “their greatest outflows in at least 10 years in December,” the paper noted.

Passive funds collected $458 billion for the year, down from 2017’s record of $663 billion, the paper notes, but still are only 38.8% of market share versus 61.2% of market share for active vehicles.

U.S. equity funds had a strong December with $14.1 billion of inflows “despite the S&P 500 dropping 9% in December,” the paper stated.

The biggest December firm gainer was iShares, with a firm-record $36.1 billion, more than triple Vanguard’s $11.4 billion, although for the year Vanguard brought in $161 million in inflows verses iShares’ $136 billion, McDevitt notes.

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