Investors Turning Away From Credit Risk

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm joined today by Alina Lamy--she is a senior market research analyst here at Morningstar. We're going to look at September fund flows.

Thanks for joining me today.

Alina Lamy: Hi, Jeremy. Thanks for having me.

Glaser: Let's start with fixed income. Obviously, the big news recently has been the Fed choosing not to raise rates in September. What kind of impact has that had in flows to fixed-income funds?

Lamy: There have been a few changes, but not drastic ones. Overall, the taxable-bond category group has seen an outflow in September as well as in August. However, the September outflow was smaller than the one in August. We've seen $8.6 billion instead of the $19 billion that went out of those funds in August. However, so far this year, flows into taxable-bond funds had been positive until June. They were negative in June, and then again there was an outflow in August and September. All this seems to indicate that there has, indeed, been more uncertainty and more volatility in the fixed-income space in the past few months.

Glaser: What kinds of bond strategies are investors favoring? What can you see in that data?

Lamy: For the past two months, investors have been going into government-bond funds, both short term and long term. On the other hand, there have been outflows from the riskier fixed-income categories--for example, high-yield bonds and intermediate-term bonds. This suggests that investors are willing to accept the lower yields of the safer government-bond funds instead of taking on the higher risk of the high-yield and intermediate-term bond funds.

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Glaser: Looking at the equity side, one of the big pieces of news has been the continued volatility in China. We've seen some outflows out from emerging markets already. Has that trend continued or have we seen any changes?

Lamy: No, we've been seeing pretty heavy outflows out of emerging markets again for the past couple of months--particularly from the diversified emerging-markets category and from Pacific Asia ex-Japan. So, the news from China has definitely made investors more cautious, and they started to react by taking money out. However, there is another factor at play there as well with commodity prices being so low--oil in particular. Most of these emerging countries are commodity-driven, and that has affected performance and, in turn, has been reflected in the flows.

Glaser: Then, how about other non-U.S. stock categories other than emerging markets?

Lamy: Overall, we've seen strong flows into international equity, particularly in the European region. Right now, at this point in time, the U.S. and Europe are in different points in their economic cycles. In the U.S., we've had a bull market for six years, and we've also had interest rates that have been really low. On the other hand, in Europe, the European Central Bank has just started implementing its quantitative-easing policies to stimulate economic growth. So, investors are trying to position their portfolios to take advantage of that potential economic growth by diversifying into international equity--particularly foreign large-blend funds, which do have a focus on Europe.

In terms of particular funds that show up on the top-flowing list, a lot of index funds on the passive side in equity received consistent inflows. There were some in the [U.S.] space as well as in the international space. So, this suggests that investors still like holding U.S. equity on the passive side, but they are also trying to gain international exposure through diversification in the European region--all while keeping a focus on cost.

Glaser: Thanks for the update on September flows today.

Lamy: Thank you for having me, Jeremy.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.