Bond Fund Inflows Trounced U.S. Equities in 2019: Morningstar

Investors showed their risk-off side by moving funds to taxable and municipal bond funds in 2019, while equity funds saw net outflows, Morningstar found in its year-end investment flows report. Overall, long-term mutual funds and ETFs netted $415 billion for 2019, more than double 2018’s $168 billion.

Morningstar also noted that “thanks to rising markets — especially in the United States — long-term assets grew to $20.7 trillion in 2019 from $16.9 trillion in 2018.”

The biggest winners were taxable and municipal bond funds, passive funds and Vanguard. Taxable-bond funds brought in $414 billion net inflows and municipal bond funds brought in $105.5 billion net inflows for the year, overshadowing equities. As analysts Kevin McDevitt and Nick Watson write in the report, “Despite the S&P 500 gaining 31.5% in 2019, U.S. equity funds had $41.4 billion in outflows, the sixth year of net outflows during the decade long bull market.”

The equity outflows were attributed partially to the impact of target date funds and other managed portfolios that trimmed “their equity exposure throughout the year to keep their allocations in line with their targets,” the report stated.

Money market funds also had a “robust” December, collecting $64 billion, with a full-year intake of $547 billion, just under the 2008 record of $594 billion. As McDevitt and Watson noted, “This occurred despite the U.S. Federal Reserve cutting rates three times in the second half of 2019.”

Bond Love

Municipal-bonds “flipped a switch” when inflows hit $7.6 billion in January 2019 alone, versus collecting $12.9 in total in 2018, “and the pace never let up,” the report states.

“The surge in demand likely came from tax law changes that curtailed tax deductions and left many investors looking for ways to generate tax-free income,” the authors speculate, adding that the $105.5 billion in muni bond funds collected in 2019 was $31 billion more than the prior record in 2009.