Mutual fund assets bounced back from a 13.3% decline in March, climbing 8.1% to some $14.5 trillion, according to Cerulli Associates’ latest U.S. monthly product trends report, released Monday.
Net outflows continued in April as funds hemorrhaged $29.3 billion; active mutual funds lost $25.6 billion and passive ones $3.7 billion. U.S. equities had net negative flows regardless of management style.
Taxable bond funds experienced positive net flows of $14.2 billion, a welcome change from their $221.1 billion outflow in March.
ETFs assets stood at $4 trillion in April on the strength of robust inflows of $45 billion and market performance. The taxable bond ETF asset class attracted $22 billion — “a notable sum given that the [U.S. Federal Reserve] had not yet commenced ETF buying,” Cerulli said in a statement.
Sector equity and commodities ETFs also had strong flows, but ETF investors continued to unload their international equity holdings.
The report said investors withdrew upward of $100 billion from fixed-income mutual funds and ETFs during both the last two weeks of March. But quick intervention by the Fed appeared to ease investors’ fears, and the fixed income broad asset class moved back into positive net flows during the weeks ending April 15, 22 and 29.
This correlated with investment-grade fixed-income prices, represented by the Bloomberg Barclays Aggregate Bond Index.
The product trends report also focused on asset managers’ growing interest in the interval fund vehicle.
A wide variety of asset managers are looking to the interval fund vehicle for its ability to invest in both liquid and illiquid holdings across asset classes while providing some relief from continued fee pressure, according to Cerulli.
In contrast to liquid alternative products, which have daily liquidity and for the most part have to hold exposures that can be quickly bought and sold, and to illiquid limited partnerships, interval funds offer a mix of liquidity — typically quarterly — by investing in a combination of liquid public securities and illiquid limited partnerships.
For example, one fund offers access to nonpublic firms, while another seeks to replicate endowment fund strategies.
The interval fund vehicle is also likely to benefit from the perceived safety of being regulated by the Investment Company Act of 1940.
According to the report, several brand-name managers have rolled out interval funds in recent years, their number growing from 11 funds in 2013 to 55 in 2019, with $38.9 billion in assets. However, Cerulli found that only one in five managers that offer alternative strategies includes interval funds in the mix, though three in four view them as a distribution opportunity.
While the vehicle’s flexibility and its use cases are promising, Cerulli noted, barriers to its wider proliferation remain, and challenges related to COVID-19 will need to be overcome.
Platform access was already a significant challenge for interval funds before the coronavirus outbreak as these vehicles may require greater due diligence and therefore the home-office expectation of greater assets to justify their inclusion. Since March, a number of distributors have put a hold on some interval fund sales.
Cerulli said interval fund manufacturers would be wise to step up efforts to educate and market both their products and the interval fund as an alternative investment vehicle through trade publications and social media.
It noted that the structure is complex to explain to advisors, who in turn have to explain abstruse features such as gated redemptions to investors.
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