October is turning out to be a month marked by volatility with the Dow Jones Industrial Average falling the past week amid a confluence of factors like rising interest rates and weakness in Chinese equities.
It was a piece of a much larger puzzle for 2018 outlined in the latest Morningstar Direct Asset Flows Commentary, which reflected the behavior of investors in September–notably, an influx of capital into taxable bond funds as well as an outflux from international markets.
According to the report, 2018 looks to be the third consecutive year that taxable bond funds will receive the greatest inflows out of the eight U.S. category groups. Taxable-bond demand was split among three segments–core, intermediate-term bond funds, ultrashort-bond funds and lastly, long government funds.
There was a notable shift out of equity funds as investors may be sensing that the extended bull run may finally be running out of steam and into core bond funds.
“First, investors are moving money into core, intermediate-term bond funds. This category received about $6.1 billion in September and leads all taxable-bond categories with about $55 billion year to date. These inflows may reflect investors rebalancing and shifting money from equity funds,” the report said. “Second, rate-sensitive investors are pouring money into ultrashort-bond funds. This category collected $5.3 billion in September and is just behind intermediate-term bond funds for the year to date with about $54 billion. Finally, long government funds received about $3.6 billion in September inflows. These funds have historically diversified equity portfolios well, but their 2018 success is still surprising.”
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The report revealed that core strategies were still in favor across asset classes, specifically with respect to U.S. equity and international equity. The report showed that large-blend U.S. equity funds received $9.1 billion of the group’s overall $10.5 billion in flows with large-blend funds receiving $35.4 billion compared to $5.8 billion for U.S. equity overall.
Outside of the bull run in U.S. equities, deep drawdowns have been experienced in the global market space, particularly within emerging markets as a result of the ongoing trade wars, particularly between the United States and China. Countries like Turkey and Argentina have seen their local currencies face severe downward pressure in addition to skyrocketing bond yields.
While it may be enticing to see the red and buy into the dip, instabilities in certain countries’ financial systems could still leave these markets depressed, and as such, investors shied away from these parts of the world. The reported cited that “world large-stock funds had $1.3 billion of outflows in September, the greatest among international equity funds. Investors had little interest in some other world strategies, with world allocation funds losing $2.1 billion in outflows.”
Allocation funds in general were hit with substantial outflows, but per the report, “it’s difficult to know what’s driving this exodus from allocation funds. It’s notable that this began around the time the 2015-16 correction kicked into gear. It may also represent a secular shift as more investors take control of their own asset allocation or outsource it to a target-date fund or advisor.”
Click here to download Morningstar’s fund flows commentary.
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