Flows Still Point to a Near Record Year for Fixed Income
Inflows into intermediate-term bond funds continue to dominate taxable fixed-income flows.
Optimism and positive performance in the third quarter gave way once again to the realities of markets and economies that continue to be fraught with risk and uncertainty. As if concerns about slowing growth in both developed and developing economies, the European debt crisis, and the upcoming U.S. elections and pending fiscal cliff weren't enough, the wide swath of destruction caused by Hurricane Sandy, which shut down trading on Wall Street for two full days, left investors once again pursuing the relative safety of bonds. The decline in the S&P 500 TR Index last month had less of an impact on flows for actively managed U.S. stock funds than we anticipated, but was still the fourth-largest monthly outflow recorded this year. With investors continuing to favor fixed income over just about every other asset class, flows into actively managed taxable bond funds have surpassed the level of inflows seen in all of 2010 and could reach the record level seen during 2009. We continue to believe that the more broadly diversified asset managers, especially those that offer a mix of active and passive strategies, strong equity and fixed-income franchises, and exposure to both domestic and international markets, are best positioned in this environment.
No Relief From Net Redemptions From Actively Managed U.S. Stock Funds
The decline in the S&P 500 TR Index last month had less of an impact on flows for actively managed U.S. stock funds than we anticipated, but with more than $32 billion pulled out of the broad asset class during August and September (when the market was actually going up), we think investors were looking to avoid the next downturn in the markets, taking advantage of the runup in stock prices overall to take some cash off the table before the end of the third quarter. The nearly $12 billion in outflows that hit actively managed U.S. stock funds during October were the fourth-largest monthly outflows recorded this year, with the category (at more than $97 billion in net redemptions through the first 10 months of 2012) on pace to surpass the level of outflows seen not only in 2011, but during 2008 as well. As we noted last month, we think this has far more to do with the performance of active managers than it does the direction of the markets. According to Morningstar's index data, domestic stock funds as a whole (which includes large-, mid- and small-cap funds dedicated to growth, blend, and value strategies) were underperforming the benchmark S&P 500 TR Index by around 150 basis points through the first three quarter of 2012, with no single category outperforming the S&P 500 TR Index at the end of the third quarter. This was also the case last year, with domestic stock funds overall trailing the benchmark index by around 250 basis points through the first nine months of 2011, so it is no real surprise to see this year's outflows from actively managed U.S. stock funds tracking the results that were reported last year. While we should acknowledge the impact that American Funds is having on the overall tally, especially in a category like large-cap growth, where American Funds Growth Fund of America has reported more than $28 billion in outflows year to date, compared with the nearly $30 billion in net redemptions reported for the large-cap growth segment overall, we have seen the outflows from American Funds diminish over time, leading us to believe that investor dissatisfaction is now on the rise in other parts of the actively managed U.S. stock fund category; this is not too surprising, given the underperformance that has been seen overall for the category over the past two years.