Reversal of Fortune in Fund Flows

After two months of outflows, the taxable-bond Morningstar Category group attracted $16.6 billion in October, its highest inflow since March 2015. The inflow was driven by passively managed funds; active taxable-bond funds experienced a $1.5 billion outflow.

High-yield and intermediate-term bond funds moved from the bottom to the top five categories in terms of monthly flows—a drastic change in investors’ appetite for risk in the fixed-income space. Last month, investors couldn’t take money out of these two categories fast enough, while at the same time rushing to the safety of long- and short-government-bond funds.

With high-yield funds, investors might be trying to anticipate the potential December interest-rate raise. Interestingly, investors seem to have lost confidence in the non-traditional-bond category, which tends to move together with the high-yield category in terms of flows. Non-traditional-bond funds had large outflows despite the fact that they are marketed as providing protection from rising interest rates.

Most category groups experienced outflows on the active side, with the exception of municipal bonds and alternatives. Interestingly, alternatives broke the generally observed “pattern” this month by posting inflows on the active side and outflows on the passive side. It appears that within a category of complex strategies, investors tend to value the expertise and skill of active managers more.

International equity continued to receive steady inflows, although still smaller in magnitude than at the beginning of this year. For U.S.-equity-focused funds, active outflows and passive inflows almost balanced each other out, resulting in a small $0.4 billion outflow for the category overall.

You can access the complete Morningstar U.S. Asset Flows Update for October here.