Continuing a multiyear trend, the lion's share of investor assets went into passively managed mutual funds in 2017.
"It's been a year of record flows into passive products overall, almost $700 billion," said Alina Lamy, senior analyst in Morningstar's quantitative research group.
But there were some actively managed areas that still attracted investor dollars: notably, actively managed bond funds and international-stock funds.
Using Morningstar Direct software, we took a look at the 25 funds that had seen the biggest inflows in absolute dollar terms during 2017. Although we screened for the largest inflows in dollar terms, we also included a trailing 12-month organic growth rate data point, which allows us to put the flows in better perspective. For instance, two share classes of the mammoth Vanguard 500 Index fund ((VFINX) and (VINIX)) are on the list of top inflows and outflows over the one-year period; the story here is not really one of investor conviction; it's more about fund distribution and sales channels.
Index Funds Rake In Money
It's no secret that investors have increasingly opted for index funds, which, among their many advantages, offer broad diversification, low fees, tax efficiency, and simplicity. Six out of 10 funds with the highest estimated net inflows were index funds, and all six of them were Vanguard funds.
Increased investment in target-date funds partially explains the heavy inflows into a few of the more widely purchased Vanguard funds. Vanguard's target-date funds use Gold-rated Vanguard Total Stock Market Index (the institutional and investor share classes, (VITSX) and (VTSMX) respectively), to provide the U.S. equity exposure for the institutional and investor share classes of this target-date series.
Similarly, that target-date series also uses various share classes of Gold-rated Vanguard Total International Stock Index (VGTSX), Vanguard Total Bond Market II Index (VTBIX), and Vanguard Total International Bond Index (VTIBX).
The two share classes of Vanguard target-date funds (institutional and the investor) combined gathered more than $56 billion in new assets combined over the 12-month Vanguard Total Stock Market Index--or even most of it, for that matter. Likewise, Gold-rated Vanguard 500 Index (VFINX) isn't even a holding in the firm's target-date funds--that fund took in $30 billion in new money.
Taxable Bond Flows a Mix of Active and Passive
Fund flows were positive for taxable bond funds, and they were divided almost equally between active and passive, Lamy said.
At number two on the list of top-flowing funds is actively managed PIMCO Income (PIMIX). This fund has had stellar returns on an absolute and relative basis compared with its multisector-bond category, gaining over 8.6% for the trailing one-year period ended Dec. 31. Its risk-adjusted returns over long periods are very impressive, too, beating every one of its category peers over five- and 10-year periods.
It certainly hasn't escaped investors' notice, either. In fact, "white-hot inflows" help explain why the fund's Morningstar Analyst Rating of Silver isn't higher, says senior analyst Eric Jacobson.
"PIMCO recovered really well with PIMCO Income, which was a really good performer after their severe outflows from Total Return," Lamy said. (PIMCO Total Return had around $5.3 billion in outflows in 2017.)
Number nine on the list, Prudential Total Return Bond (PDBAX), is run by a well-resourced and experienced team and has outlegged its intermediate-term bond peers over both long and short periods. Jacobson pointed out that Prudential has improved the fund's pricing, which contributed to our decision to raise the fund's Morningstar Analyst Rating to Silver.
Some other intermediate-term bond funds that were popular with investors included Gold-rated Dodge & Cox Income (DODIX), Bronze-rated American Funds Bond Fund of America (ABNDX), and Neutral-rated Guggenheim Total Return Bond (GIBIX). Municipal bond fund Vanguard Intermediate-Term Tax-Exempt (VWIUX) and short-term bond Vanguard Short-Term Investment-Grade (VFSIX), both rated Silver, also made the list.
Passive funds such as Silver-rated Vanguard Total Bond Market Index (VBMFX) and Fidelity US Bond Index (FBIDX), and Vanguard Short-Term Inflation-Protected Securities Index (VTIPX) were also popular with fixed-income investors.
Some Active International Strategies Still in Demand
Investors haven't thrown in the towel on actively managed strategies altogether, though. In particular, some international-stock funds were among the top asset-gatherers.
One that has attracted investors' notice is Gold-rated Oakmark International (OAKIX). The fund landed in the top quintile of its foreign large blend category in 2017, and it has managed the same feat over longer stretches, too. In a recent Fund Analyst Report, senior analyst Greg Carlson pointed out that Herro now runs $51 billion in this strategy. Harris Associates, the fund's advisor has a history of closing to new investors in order to preserve its investing style; after reopening to new investors in July 2016 and seeing strong inflows, partly because of excellent showings in 2016 and 2017, Harris Associates again closed the fund to new investors on Friday.
Gold-rated American Funds Europacific Growth (AEPGX) was also popular with investors,attracting $4.5 billion in new assets, and Silver-rated American Funds American Balanced (ABALX) took in $4.6 billion. (Certain share classes of Europacific Growth and American Balanced are also underlying holdings in American Funds' target-retirement funds, which was the target-date series with second-highest inflows after Vanguard's.)
Download the complete Asset Flows Commentary here.
Karen Wallace does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.