Funds Receive Record Inflows in 2017

Investors displayed an overwhelming preference for taxable-bond and international-equity funds last year. As the U.S. stock bull market is fast approaching its nine-year anniversary, two trends have become predominant: rebalancing from stocks to bonds, and diversifying stock allocations internationally.

Taxable-bond funds were by far the most popular Morningstar category group in terms of active flows, demonstrating that an active manager's skill in fixed income is still valued. On the flip side, active U.S. equity was the most unpopular category group, with a $207 billion outflow in 2017. The two other category groups with negative flows on the active side were allocation and sector equity.

U.S. equity shone on the passive side, with inflows of $220 billion. Investors have been generally maintaining their U.S. equity positions, but switching from high-cost active to low-cost passive. Passive taxable-bond and international-equity funds also received inflows above $200 billion, as indexing is no longer limited to U.S. equity and expanding into other asset classes.

Overall, open-end mutual funds and exchange-traded funds received a record influx of money in 2017: $684.6 billion. Active funds almost broke even in 2017, which was a relative victory after the extreme outflows of 2015 and 2016. This happened because the total was pulled up by the significant taxable-bond inflow. Without taxable bond, active funds would have suffered a $185.8 billion outflow.

Notable trends during the past few years include:

• Active U.S.-equity flows have been negative since 2006.

• Active taxable-bond funds started to become popular again in the past two years.

• After a drop in flows in 2016, investors once again started to diversify internationally, with a strong preference for foreign large-blend (which is mostly focused on Europe) in 2017.

• Exchange-traded funds are becoming more and more popular.

Download the complete Asset Flows Commentary here.