Investors Return to Bonds in January

Any new beginning is uncertain, and this held true for markets in the first month of 2017. The new president’s promises of tax cuts and infrastructure spending appeared to spur newfound confidence in U.S. equities late last year, driving flows into U.S.-equity funds in November and December. January, however, saw a much smaller amount stream into U.S.-equity funds, and the majority of the flows redirected to fixed-income and international-equity funds.

The Federal Reserve raised rates in December for the second time since the 2008 crisis (the first time was exactly a year before, in December 2015). Despite the fact that traditional bonds do not typically perform well in rising-rate environments, investors still chose taxable-bond funds in the month following the rate increase.

In terms of active versus passive, the only two category groups that attracted inflows on the active side in January were taxable- and municipal bond.

Other notable fund-flows trends in January included:

• The massive exodus from actively managed U.S.-equity funds continued in January with a $20.8 billion outflow.

• January flows into U.S. equity were diminished, but remained positive. International-equity flows, on the other hand, increased to $16.5 billion on the heels of encouraging economic data from Europe.

• At the Morningstar Category level, large-blend and mid-cap blend were both in the top five, although their inflows all came from the passive side and were drawn back by outflows on the active side.

• Among the fixed-income categories, intermediate-term bond was a favorite, joined in the top five this month by bank loan funds.

Access the full Morningstar U.S. Asset Flows Update here.