Investors Keep Flocking to Safety

Jeremy Glaser: From Morningstar, I'm Jeremy Glaser. Investors continue to seek safety, and I'm here with Alina Lamy, she's a senior market research analyst, to look at the fund flows for the last quarter. 

Alina, thanks so much for joining me. 

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

Glaser: So we got the fund flows data for last quarter and for last month as well. It looks like Brexit did not have that big of an impact yet. 

Lamy: I was really surprised. I was expecting to see a little bit larger outflows from international stock funds, but they weren't that big, which tells me two things. First of all the Brexit shock wasn't as powerful for U.S. investors as we thought it would be. And then most investors are staying with their asset allocation to international stocks. So if it's in their longer term plan to allocate to international stocks they are. If not they are staying the course, so that was pretty much a good thing. 

Glaser: So if we didn't see a big shock from Brexit though we did still see this kind of flight to safety that that's been going on, or flight to quality. What kind of evidence are you seeing of that?

Lamy: That has been happening. So after the January sell-off in the stock market. We started seeing a reversal in taxable bond flows and muni bond flows. Those were in the negative territory last year. But in February they became positive and they stayed positive ever since. Most of the flows went into intermediate term bond funds which make sense if you think about it, because they are middle of the road option. Short-term bonds don't yield enough and longer term bonds are really sensitive to interest rates. So intermediate-term bonds are a good option. And also in muni bond funds we started seeing constant flows going there which again makes a lot of sense because of the tax benefits. In a low return environment investors are going to take what they can get. They can get decent returns and the tax benefits--sure I'll take that.

Glaser: But you are seeing investors continue to pull back from U.S. equities from some other equity categories. 

Lamy: The U.S. equity category. So what happened is there was a large outflow out of active equity funds this past month. But still inflows on the passive side. So we are still seeing that trend, that trend is here to stay. I think what also happened is that when there is trend already established and there is a shock in the markets that tends to amplify the trend a little bit. So we saw larger active outflows this past month across the board. Also back to the flight to safety trend. We saw significant flows into gold, SPDR Gold Shares was a favorite with investors. And that's because gold is perceived to be a safe haven in terms of market distress. So investors are sensing that. 

Glaser: So despite the kind of good market returns we've had investors still seem to be little bit skeptical of stocks even with those passive inflows. 

Lamy: There is a lot of uncertainty with Brexit and now with, I think the next major event is going to be the U.S. presidential election. And there is lot of uncertainty around interest rates still lingering and worries about global growth. The World Bank just downgraded its forecast for global growth recently, too. So there is concern, and there is uncertainty. So we can definitely see that in the flows. 

Glaser: You mentioned passive continues to get more inflows that’s a trend that's here to stay. When you look at the fund family flow data. Was it really just that the companies that have lot of passive funds did well and lot of active funds did poorly? What were the trends there?

Lamy: In general, that's the trend. Vanguard obviously did really great because they are focused on the passive offering. One exception on the active side was American Funds. They had pretty consistent inflows over the past few months although not in June, they had outflows in June. And most of that was because of the American Balanced fund. That has been doing really well and it's been a favorite with investors.

Interestingly again Fidelity on the active side, they announced at the end of June that they are going to cut fees on 27 of their index funds and ETFs in an effort to compete in the passive space. They realized that at this point, investors realize they have to control costs. They can't control returns, at this point they can control cost. So Fidelity is starting to position themselves to compete in that space so it's going to be interesting how that’s going to move flows going forward. 

Glaser: When you see a company like Vanguard have inflows in both the active and passive side that tell you investors are really choosing active versus passive or is it more about costs? Is there anything we can infer from that?

Lamy: That's really interesting, most of the inflows go into passive even for Vanguard, but once you built a strong reputation on the passive side, I think that effect kind of ripples over on to the active side as well, and their active options are good quality, too.

Glaser: Well, Alina I certainly appreciate your take on this fund flows data today.

Lamy: Thank you Jeremy. Glad to be here.

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