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Leery After Lehman

Since the Lehman Brothers bankruptcy five years ago, we've seen several notable shifts in how investors have been allocating their investment dollars.

Adam Zoll, 09/11/2013

Do you remember where you were Sept. 15, 2008? Depending on how closely you follow the financial news, you may or may not recall that that's the day Lehman Brothers filed the largest corporate bankruptcy in U.S. history, a move that marked the worsening of a crisis set in motion by the bursting of the housing bubble and an increasing number of defaults on subprime mortgages.

Whether you remember that day specifically or not, you probably recall the weeks and months that followed as the crisis sent the market into a frenzy, with the Dow Jones Industrial Average swinging hundreds of points daily. The market would reach a bottom about six months later and then begin the bull run that continues to this day.

But the shock waves of the financial crisis--brought into greater relief by the Lehman bankruptcy--linger even today. Many investors fled stocks for the perceived safety of bonds or cash. Even as the Dow rebounded from its closing low of 6,547 on March 9, 2009, to its current reading of more than 15,000, investors continued pulling cash out of equities. U.S. equity mutual funds and exchange-traded funds saw combined net outflows of between $42 billion and $54 billion every year from 2009 to '12, though the trend appears set to turn positive for 2013 with more than $80 billion added through July.

A look at how investors have allocated assets since the Lehman bankruptcy illustrates their post-crisis risk aversion, at least when it comes to stocks, as well as the increasing popularity of passively managed funds. Since the fall of 2008, all category groups, as classified by Morningstar, have seen asset growth--even equities because of the strength of the market rally. But even though the amount of assets held in domestic- and international-equity funds and ETFs increased by about 50% from Sept. 1, 2008, to July 31, 2013, assets held in nonequity and alternative categories rose much faster as many investors sought to avoid traditional equity exposure. Assets in taxable-bond, commodities, and alternative funds all more than doubled during that time span. As a result, taxable-bond mutual funds and ETFs have grown from $1.2 trillion in total assets just before the Lehman bankruptcy to $2.7 trillion as of July 2013. U.S. equity funds and ETFs, by comparison, grew from $3.2 trillion to $4.8 trillion during that time.

A look at funds that have seen the largest inflows and outflows (redemptions) in the five years since the Lehman bankruptcy also is revealing. First let's look at inflows. Below is our list.

Funds and ETFs With Largest Net Inflows (Aug. 31, 2008-Aug. 31, 2013)
Analyst Rating
5-Year Net Inflows
5-Year Return (Annualized)
Category Percentile
Vanguard Tot Stk Mkt Idx VTSMX
Large Blend
$75.0 Billion
9.4% 16
Vanguard Tot Intl Stk Idx VGTSX
Large Blend
$64.7 Billion
4.1% 44
PIMCO Total Return PTTAX
Interm-Trm Bd
$61.3 Billion
6.0% 28
Templeton Global Bond TPINX
World Bond
$49.4 Billion
9.1% 1
Vanguard Emerg Mkt Stk Idx VEIEX
Divrs Emg Mkt
$46.2 Billion
4.8% 39
Vanguard Tot Bd Mkt Idx VBMFX
Interm-Trm Bd
$36.8 Billion
4.4% 77
Large Blend
$35.2 Billion
8.7% 58
Lord Abbett Short Duratn Inc LALDX
Short-Term Bd
$30.9 Billion
5.6% 4
PIMCO All Asset All Authority PAUIX
World Allctn
$30.4 Billion
6.1% 39
Vanguard Institutional Idx VINIX
Large Blend
$29.7 Billion
8.9% 25

The fact that bond funds make up half the list should come as no great surprise given the trends we've already mentioned.

But also noteworthy is the fact that more than half of the funds on the list are passively managed, with Vanguard managing most of those funds. Asset growth for some of these funds may be attributable in part to the increased use of target-date funds in 401(k) plans, many of them index-based, and the fact that plans are increasingly enrolling workers automatically. But it's also clearly a reflection of the growing overall popularity of indexing as an investment strategy. Six of the funds carry Gold Morningstar Analyst Ratings, with two Silver-rated funds included on the list, as well. Lord Abbett Short Duration Income LALDX, which carries a Neutral rating, is the only nonmedalist mutual fund on the list.

Now let's turn our attentions to funds that have experienced the largest outflows.

Funds With Largest Net Outflows (Aug. 31, 2008-Aug. 31, 2013)
Analyst Rating
5-Year Net Redemptions
5-Year Return (Annualized)
Category Percentile
Am Fund Grwth Fund of Am AGTHX
Large Growth
$89.8 Billion
8.7% 53
Am Fund Cap Wrld Gr & Inc CWGIX
World Stock
$36.0 Billion
6.5% 58
Am Fund Cap Inc Bldr CAIBX
World Allctn
$30.6 Billion
6.2% 33
Am Fund Inv Co Amrca AIVSX
Large Blend
$28.6 billion
8.1% 49
Davis New York Venture NYVTX
Large Blend
$26.8 Billion
6.8% 79
Am Fund Wash Mutual AWSHX
Large Value
$21.5 Billion
8.2% 34
Fidelity Divsfd Intl FDIVX
Large Blend
$20.3 Billion
3.8% 54
Fidelity Magellan FMAGX
Large Growth
$19.6 Billion
6.0% 92
Fidelity Equity Income FEQIX
Large Value
$16.7 Billion
7.2% 59
Dodge & Cox Stock DODGX
Large Value
$16.6 Billion
8.5% 26

The prevalence of actively managed stock funds on the list, including five out of the top six from American Funds, speaks volumes about the mind-sets of many investors since the Lehman bankruptcy. (Morningstar analysts recently reported that American Funds had seen more than $260 billion in asset outflows in the four-year period ended July 2013.) Also keep in mind that we are looking at asset outflows on an absolute, rather than a percentage, basis, and that some funds on this list have (or used to have) very large asset bases, meaning that even a small percentage loss in assets can translate into billions of dollars.  

Although a few funds on the list have been lousy performers--we're looking at you, Fidelity Magellan FMAGX--most have been at least mediocre if not better. The fund that has seen the heaviest outflows, the actively managed American Funds Growth Fund of America AGTHX, has middling five-year returns, but it still looks solid during longer time periods, falling into the top 25% and top 5% of its peer group during the trailing 10- and 15-year periods, respectively. The fund carries a Bronze Analyst Rating, and five others on the list with it also are recommended by Morningstar analysts, including four with Gold ratings. The story of American Funds specifically goes beyond just performance, and also involves the firm's distribution and marketing decisions, as recently examined by Morningstar's vice president of research, John Rekenthaler.

The lesson here isn't that fund investors should always stay put no matter what. Rather, it's that even good funds can fall prey to changes in investor sentiment--especially during a time of great upheaval in the market. It's a lesson to keep in mind the next time a Lehman-sized jolt comes along.

Five-year annualized returns as of Sept. 9.


Adam Zoll is an assistant site editor with Morningstar.com


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