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By Christine Benz and Timothy Strauts | 01-14-2015 11:00 AM

Index Funds Clean Up (Again) in 2014

Indexing, Vanguard, and equity funds were among the year’s asset gatherers, while taxable-bond funds and PIMCO were on the losing end.

Christine Benz: Hi, I'm Christine Benz for Morningstar. Investors continued to demonstrate a strong preference for passively managed products in 2014. Joining me to discuss this phenomenon is Tim Strauts. He's a senior markets research analyst for Morningstar. Tim, thank you so much for being here.

Tim Strauts: Thanks for having me.

Benz: So, Tim, when you look at the headlines in terms of what fund categories investors were buying in 2014, it was a decent equity market, so probably not surprising that investors were putting money into equity funds.

Strauts: The biggest categories for flows into equities were large blend and foreign large blend, and that's not because investors love blend funds. It's primarily because they are moving toward index funds. The major index funds fall into the blend category.

Benz: Another category that we've been monitoring has been emerging markets. Investors have ebbed and flowed in terms of their flows into emerging markets. Let's talk about what you're seeing there.

Strauts: It was one of the biggest outflows this last month, obviously, because of the drop in oil prices and the Russia situation and some weakness in China. Emerging-markets returns have not been as good, so investors are rightly concerned. And also a factor is the rise in the U.S. dollar, which makes returns in emerging-markets currencies less attractive. But over the year, emerging markets still were positive with a total of about $12 billion in inflows. Just in the last, say, three to four months, we've seen large outflows in the category.

Benz: When you look at the biggest losers in terms of asset outflows, taxable bond, in terms of asset classes, you say leads the way and you say that that's driven mainly by big outflows at PIMCO Total Return (PTTRX) and other PIMCO products.

Strauts: On the active side, we saw $23 billion in outflows out of taxable bond, and that is almost 100% coming from PIMCO Total Return--the large outflows. And flows out of the fund, PIMCO Total Return, were negative $18.1 billion last month, which is kind of a worrying sign because we were seeing improvement in the flows out of Total Return; but this month, we actually saw acceleration. So, in November, it was only a $10 billion outflow and now we've accelerated to $18 billion.

So, some investors clearly were reallocating their portfolios at the end of the year. And actually, we see that PIMCO showed us the daily flows out of the fund, and on the last day of the year, there was a big spike in outflows. Clearly, people wanted to have their portfolios reallocated for the first of the year.

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