Morningstar says investors rushed the exits in 2018

Net flows into mutual funds and ETFs were the lowest since the 2008 financial crisis, while money-market funds captured inflows

Jan 17, 2019 @ 1:23 pm

By Jeff Benjamin

Investors ran for cover in 2018, according to the latest data from Morningstar showing last year's level of net inflows into U.S. mutual funds. Net inflows into ETFs were the lowest since 2008.

In a year that saw the S&P 500 Index finish down 4.4%, taking into account dividends,including a fourth-quarter drop of more than 12%, net flows into U.S. funds totaled just $157 billion. Last year's net flows are still huge compared to the $11 billion in net flows from 2008, but pose a stark contrast to the nearly $700 billion in net flows in 2017.

In line with that trend was the increase in assets flowing into the relative safety of money market funds, which saw $162 billion in net inflows, the highest level since 2008, when net flows reached nearly $600 billion.

Morningstar analyst Kevin McDevitt said December stood out as the roughest month of the year for funds.

There were $83 billion in net outflows from mutual funds and ETFs in December, making it the worst month for net flows since the depths of the credit crisis in October 2008, when net outflows hit $103 billion.

"The money going to money-market funds just indicates that investors are cutting risks," Mr. McDevitt said. "In the fourth quarter in general it was happening, as we saw corrections in both the equity and credit markets."

With $43 billion worth of net outflows, taxable bond funds represented more than half of December's net outflows for all funds.

The Bloomberg US Aggregate Bond Index finished 2018 up just one basis point, while Morningstar's corporate bond fund category was down 2.5% for the year.

"Taxable bond mutual funds, which had been the area that had maintained investor loyalty for years, weakened in the fourth quarter," said Todd Rosenbluth, director of mutual fund and ETF research at CFRA.

"Investors are happy to pay up for active management when it's working, but with bonds safety is paramount," Mr. Rosenbluth said. "We've started to see cracks in the taxable bond space as we've seen weakness in bond fund returns."

The two fund categories with the highest net inflows last year were large-blend funds and foreign large-blend funds, each logging more than $91 billion in net flows.

The two funds that saw the most net flows last year were the $327 billion Vanguard Total International Stock Market Index (VTPSX), which had net flows of $52 billion, and the $672 billion Vanguard Total Stock Market Index (VITSX), which had net flows of $49 billion.

Mr. McDevitt attributed the high flows into those two low-cost index funds to the fact they are likely part of a lot of target-date retirement plans that rebalanced late in the year as markets were falling.

"It shows how much things have changed from years ago when investors would chase performance," he said. "With the rise of target-date funds and other managed portfolios, you're seeing less of that kind of performance chasing."

In December, for example, when the S&P was down 9%, the Vanguard Total Stock Market Index fund led all funds, with more than $14.1 billion in net flows.

"Now, poor performance means you get more money into those funds," Mr. McDevitt said. "That's a sea change of conventional wisdom of how investors used to behave."

Total estimated net flows for U.S. fund categories
Total estimated net flow
CATEGORY Dec 2018 1 year Assets
US equity $14,140M $32,388M $7,358B
Sector equity -$17,856M -$25,876M $799B
International equity -$13,079M $87,910M $2,797B
Allocation -$16,497M -$64,276M $1,232B
Taxable bond -$42,997M $125,772M $3,779B
Municipal bond -$191M $11,824M $719B
Alternative -$7,681M -$12,292M $189B
Commodities $812M $1,816M $90B
All Long term -$82,967M $157,266M $16,953B
Money market $57.287M $161,596M $2,999B
Source: Morningstar Direct Asset Flows. Data as of Dec. 31, 2018

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