Continuing where we left off last time, this post looks at what areas of the market are attracting new assets (Exhibit 1). The table includes U.S. open-end mutual funds and ETFs.
Exhibit 1 – Asset Flows by Category ($ billions, May 2015)
Here are my observations about overall trends and each category:
- Over the past year, U.S. mutual funds and ETFs had total inflows of $445 bn or 3.1% of their starting size. Actively-managed funds actually had net outflows which was offset by the increasing popularity of passive strategies. Are investors actually getting smarter or is it just a fad driven by really lousy performance of active managers?
- U.S. Equity category overall barely budged, but there was a pronounced flight from active to passive strategies. Active managers lost 4% of their assets, while index ones gathered 7%.
- Sector Equity gathered $59 bn or 13% of all net inflows over the past year. This seems quite high for a relatively small category. Digging deeper I see that $27 bn of it went into Healthcare funds – a splendid example of investors chasing performance. Although energy and MLP funds also had strong inflows of $21 bn – possibly as investors went bargain-hunting after a big drop in those areas.
- International Equity was the star performer at $208 bn (capturing 47% of all inflows). Passive options attracted 78% of new assets – this was partly driven by huge interest in currency-hedged ETFs. We shall see how sticky this money is, it might come right out should the dollar strength reverse.
- There is not much to say about Allocation category. As I explained in the last post, the mechanics of fund-of-funds make meaningful analysis difficult.
- Taxable Bond attracted $93 bn in new money good for a second place. Similar to domestic equities, we saw a migration from active to passive strategies here. A word of caution – this trend was strongly influenced by massive outflows from PIMCO Total Return fund following Bill Gross’ departure. A lot of that money found its way to Vanguard Total Bond Market Index.
- Munis saw decent inflows – about $33 bn or 6% of assets. Lion’s share of that went into active strategies as investors still prefer selection process driven by human managers. In this particular case I agree with that conclusion – it’s not a homogeneous market by any stretch. Furthermore, index based on the amount of debt outstanding might lead to large exposure to some struggling entities (recently illustrated by Puerto Rico’s troubles).
- Surprisingly, Alternatives pulled in “only” $12 bn, but it’s still a small category. Passive is not so popular here either.
- Last (and least in my opinion), Commodities had moderately positive flows. And about half of those purchasers were content with passive exposure.