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Fund Outflows in March Topped Outflows in October 2008

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Advisors and strategists who believe that the current downturn won’t be as bad as 2008 and that actively managed funds will outperform passive might want to consider what happened in March. 

As volatility reigned supreme in stock and bond markets because of fallout from the COVID-19 pandemic, money rushed into cash equivalent accounts, and out of most other types of funds, both passive and active, according to Morningstar’s latest fund flows report. Only passive U.S. and international equity funds, alternatives and commodities saw net inflows.

Investors pulled $326 billion from mutual funds and ETFs overall in March — more than three times the $104 billion in outflows in October 2008, in the midst of the financial crisis, according to Morningstar. March 2020 outflows accounted for 1.7% of $19.7 trillion in fund assets, a bigger chunk than the 1.5% that exited funds in October 2008.

Most stock and bond markets have since recovered from their lows — the S&P 500 has recovered half its 24% decline to date — due in large part to Federal Reserve intervention and federal aid programs to address the sufferings of individuals and businesses. Whether that rebound lasts and grows or reverses itself remains uncertain. 

The “panic dynamic has eased, and markets are more orderly now,” says Scott Knapp, chief market strategist at CUNA Mutual Group. He thinks “the worst is likely over for the markets” but notes “we are not out of the woods yet.” 

Investors favored the safety of money market funds in March, stashing a record $685 billion in such funds. That accounted for almost all of the net inflows for the quarter, which totaled $694 billion. Taxable bond funds, in contrast, experienced a record outflow of $240 billion, ending 14 consecutive months of inflows.

All bond categories experienced outflows in both active and passive funds except short-term government funds and passive large blend funds. Muni bond funds suffered outflows as concerns about tax revenues and cash flows grew because of the economic shutdown caused by the pandemic.

Investors typically choose bonds over stocks in big stock market downturns, but that wasn’t so easy in March. As Individuals and institutions, including banks, scrambled to raise cash, liquidity in the usually orderly U.S. bond market began to dry up, creating extremely choppy markets until the Fed intervened. In addition, retail investors chose to sell bond funds over stock funds, which had fallen even further, to avoid realizing even larger losses when raising cash.

Monthly outflows hit Fidelity Investments and Vanguard the hardest. Investors pulled over $39 billion from Fidelity funds and $37 billion from Vanguard funds. After them were large outflows from the funds of Pimco ($26.9 billion), American Funds ($15.6 billion) and JPMorgan ($14.3 billion). None of the top 10 fund families, which also include BlackRock’s iShares, State Street Global Advisors, T. Rowe Price, Invesco and Dimensional Fund Advisors, had positive net inflows in March.

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