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

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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.

Passive taxable-bond flows surpassed the active counterparts, the report states ($230 billion versus $184 billion), dominated by the intermediate core bond Morningstar category. Core strategies saw the bulk of inflows in bond and stock funds.

There also was strong demand for high-yield bonds, at $25.5 billion. The report states that “this taste for credit risk and relatively high yields that come with it also showed in record inflows for intermediate core-plus bond funds.”

However, this did not extend to bank-loan funds, which saw outflows. The authors noted this likely was due to investors no longer needing to protect themselves from higher rates.

Passive funds finished the year with a 51.2% share of the total U.S. equity funds market based on assets, with inflows of $163 billion for the year, largely going to core and large-blend funds. Active funds saw outflows of $204 billion. However, as the authors noted, “because of 2019’s powerful rally, active U.S. equity assets hit a new record of nearly $4.6 trillion, up from $3.7 trillion at the end of 2018. They’re not dead yet.”

Categories that saw the largest inflows were intermediate core bond and large blend, while “laggards” were large growth and bank loans.

Vanguard had a great December, with inflows of $22 billion, leading all firms. And though its 2019 inflows of $183 billion were better than 2018′s, it still hasn’t matched levels from 2014 through 2017. That said, the firm’s long-term assets “thanks to rising markets” grew to $5.3 trillion, a 25.7% market share.

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