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By Christine Benz and Alina Lamy | 01-14-2016 11:00 AM

Investors Head Toward the Exits of Active U.S. Funds

2015 saw the largest outflows from U.S. equity funds--driven by redemptions at actively managed funds--and the largest inflows to international-stock funds.

Christine Benz: Hi, I'm Christine Benz for U.S. equity-fund flows ended 2015 with a whimper. Joining me to discuss the latest fund-flow data is Alina Lamy--she is a senior analyst with Morningstar's market-research team.

Alina, thank you so much for being here.

Alina Lamy: Hi, Christine. Thank you for having me.

Benz: You monitor fund flows for Morningstar, looking at that intersection between investor behavior and inflows into funds. We have continued to monitor outflows from U.S. equity funds for the better part of 2015. It looks like they really didn't get any better in December, and U.S. equity funds were in outflows for the whole year.

Lamy: They were indeed. Actually, 2015 was the year with largest outflows out of U.S. equity fund and, on the other hand, the year with the largest inflows to international-equity funds. There are a few reasons why this happened. One reason is that the Fed just raised interest rates--contractionary policy for the first time in 10 years. Meanwhile, the European Union is still in quantitative-easing mode. Investors might be seeing higher potential returns overseas in the future. This is unusual because flows tend to follow performance, but this is looking more like an anticipatory mode.

Benz: When you look at U.S. equity, it looks like there were inflows into passive products, but they didn't make up for all of the money coming out of active funds.

Lamy: Correct. The large outflow for U.S. equity funds consisted of very large outflows out of active and inflows on the passive side. That's been a consistent pattern we've been seeing for a few years now.

Benz: We've been monitoring these flows into international equity--and performance hasn't been that good. Actually, U.S. equity funds generally outperformed foreign-stock funds during 2015. You mentioned that maybe investors are looking ahead and trying to capture what they think might be greater growth overseas; but are there any other factors that you think are driving those flows into international-equity funds?

Lamy: There is the forward-looking aspect of it, and another reason is that a lot of these flows are coming through the retirement-plan channel through funds of funds--specifically target-date and target-risk funds. A lot of these plans have been increasing allocations to international equity recently--Vanguard is one example. They've been enhancing their diversification for their target-date funds with increased international-equity exposure. It's worth noting that a large portion of these international-equity flows are coming through that retirement channel because allocations have been increasing to international equity.

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