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Stock Strategist

Rising Stock Markets a Bigger Positive for Passive Equity Flows

Investors continue to shun actively managed U.S. stock funds even as equity markets rally.

The ongoing rally in the U.S. equity markets (with the S&P 500 TR Index up 16.7% since the start of the year) has done nothing to persuade investors to put more capital into actively managed U.S. equity funds, according to the most recent fund flow data provided by Morningstar Direct. Much as we've seen the past five years, the majority of the capital that has been going into equities is being directed at passively managed products--index funds and exchange-traded funds--which have become the default option for investors looking to gain exposure to equities. While there was some thought that fixed-income flows would falter this year, the data through the first three weeks of May would indicate that investors have not thrown in the towel on the category, with flows for taxable fixed-income products tracking the quarterly run rate that has been in place since the financial crisis.

Outflows Continue for Actively Managed U.S. Equity Funds
Even as the U.S. equity markets gained more ground in the second quarter (with the S&P 500 TR Index up more than 5% since the end of March), investors have reverted to shunning actively managed U.S. equity funds, with January just a blip in what has been a six-year trend of outflows from the category. Flows have been positive for actively managed U.S. equity funds in just 13 out of 72 months, with more than half of those positive flow periods occurring during the first two months of the calendar year. This means that absent the portfolio rebalancing and retirement funding that typically takes place in the first quarter of any given year, the flow picture would be even more dire for managers of actively managed U.S. stock funds.

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