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25 Funds Investors Dumped in 2017

Though investors continue their shift toward passive products and target-date funds, outflows from active funds were calmer than they've been in recent years.

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Investors continue to dump higher-priced funds in favor of lower-priced fare--not only in U.S. stock categories, but in foreign-stock and bond categories, too.

That's one takeaway from the results of our survey of individual funds that investors sold in 2017. (Last week we covered the top 25 funds they've been buying.) The good news for active funds was that the 2017 outflow was minimal compared with previous years, though, said Alina Lamy, a senior analyst in Morningstar's Quantitative Research Group. 

"It was an outflow ... . But it was really close to zero as opposed to 2015 and 2016 when the outflows were really heavy. It's almost a victory" for active funds, Lamy said. 

Using Morningstar Direct software, we took a look at the 25 funds that saw the biggest redemptions in absolute dollar terms during 2017. Although we screened for the largest redemptions in dollar terms, we also added a trailing 12-month organic growth data point, which helps put the flows in better perspective. Inflows and outflows to giant funds tend to tip the scales on a dollar-weighted basis even when the flows are a relatively small percentage of the fund's assets. For instance, two share classes of the mammoth Vanguard 500 Index fund--(VINIX) and (VFINX)--are on the list of top inflows and outflows over the one-year period; the story here is not really one of investor conviction, it's more about fund distribution and sales channels.

Eight out of 10 funds with the highest estimated net redemptions were actively managed funds, in a wide array of categories. By contrast, six of the top 10 most heavily purchased funds were index funds.

And finally, investors continue to chase performance. In many cases, the funds that are seeing redemptions have had disappointing returns over the short term, the long term, or both.

Redemptions Hit Large-Cap Equity Funds
Outflows were not concentrated in any particular category last year, but there was a trend toward U.S. large-cap funds. 

Silver-rated  Fidelity Contrafund's (FCNTX) $5.3 billion outflow is just a fraction of its $133 billion asset base. Still, the reasons investors are selling are not obvious, as the fund has been a decent performer on an absolute and relative basis over both short- and long-term periods. We can only speculate on the reasons, but Katie Reichart, associate director of equity strategies in our manager research group, thinks part of the outflows owes to investors' retreat to passive vehicles.

Neutral-rated  MainStay Large Cap Growth (MLAIX) has failed to deliver compelling results under its current managers, who have been in charge since March 2013. The fund's annualized Sharpe ratio over their tenure lags the category average and the benchmark. 

"The year 2016 was the strategy's worst relative to peers and the benchmark as the fund's tilt toward more-expensive names proved highly detrimental," said Thomas Lancereau, director of global multi-asset and alternative strategies.

Sometimes though outflow data doesn't tell the whole story, and a closer look is warranted. For instance,  T. Rowe Price Growth Stock (PRGFX) shed $7 billion in assets last year, despite gaining 33% and landing in the large-growth category's top quintile. In fact, the fund has landed in the category's top quintile in the trailing three-, five-, and 10-year periods as well. What gives there?

Although the fund's no-load investor share class (PRGFX) and its advisor share class (TRSAX) had outflows during 2017, the more recently launched I share class (PRUFX) had inflows. This is likely due to the fact that the no-load share class of T. Rowe Price Growth Stock is used in the firm's no-load share class of its Retirement target-date series, while the I share class of the fund is used in the I share class of the series. 

"While the no-load Retirement funds saw net outflows in 2017, the Retirement I funds and the collective trusts had net inflows that more than offset those losses," explains senior analyst Leo Acheson.

The same logic likely applies to the no-load share class of Bronze-rated  T. Rowe Price Equity Index 500 (PREIX), a top holding in the no-load share class of the Retirement funds.

Investors Chase Performance in Fixed Income
Number six on the list, and the most heavily redeemed bond fund for the third year running, was Silver-rated  PIMCO Total Return (PTTRX), which saw $5.3 billion in assets exit during 2017. The late-2014 departure of Bill Gross certainly started the stampede; in 2014 the fund lost an estimated $93 billion in assets; then in 2015 and 2016 it lost another $53 billion and $14 billion, respectively. Middling performance over the medium term hasn't convinced investors to stick around, either. 

Disappointing relative short-term performance is probably the major story at Neutral-rated  DoubleLine Total Return (DBLTX). Despite its competitive longer-term record, the fund landed in the bottom quartile of the intermediate-term bond category in 2016 and finished toward the middle of the pack in 2017. 

By contrast, the list of 25 open-end funds with the biggest inflows reveals investors flooded into passive bond funds Silver-rated  Vanguard Total Bond Market Index (VBMFX) and  Fidelity US Bond Index (FBIDX). Actively managed bond funds Silver-rated  PIMCO Income (PIMIX) and Silver-rated  Prudential Total Return Bond A (PDBAX) also raked in new assets.

There are probably several trends at work here. One is performance-chasing: Prudential Total Return Bond landed in the category's top quintile in 2016 and finished 2017 as one of the category's best performers. PIMCO Income has had stellar returns on an absolute and relative basis compared with its multisector-bond category, and its risk-adjusted returns over both short and long periods outleg the average fund in the intermediate bond-category by a considerable margin.

Two other themes are likely at play: the migration to passive funds, and the rising popularity of target-date funds. Although taxable bond funds have been one of the few asset classes in which inflows to active funds have continued to outpace those into passive funds, fixed-income index funds have seen strong inflows, stemming in part from target-date funds' increasing popularity. (Some bond index funds, such as Vanguard Total Bond Index fund, are used as underlying holdings in target-date funds.) 

Investors Turn to Indexing in International Categories
Though Gold-rated  Templeton Global Bond (TPINX) had very strong relative performance in 2016, landing in the top quintile of the world-bond category, the fund's disappointing performance in 2015, when it lost 4.3%, plus a bottom-quartile performance in 2017, may have dented investors' confidence. 

"While the manager has been successful over the long term, it's important to note that the fund's key themes have worked against it at times and can weigh on results in the medium term," explains associate director of fixed-income manager research Karin Anderson. "Its short duration (close to zero for the past few years) has weighed on the fund in periods of stable rates, and its significant shorts on the yen and euro have hurt when those currencies strengthen relative to the U.S. dollar."  

As Templeton Global Bond shed $3.7 billion in assets, new money poured into an index fund in the world-bond category-- Vanguard Total International Bond Index (VTIFX)

Investors also continue to flee Silver-rated  Harbor International (HAINX); they may be reacting to the fund's bottom-quartile three- and five-year returns relative to the foreign large-blend category. 

One reason for Harbor International's underperformance has been its opportunistic misfires. These poor stock picks, plus its rising expenses resulting from outflows, led senior analyst Kevin McDevitt to downgrade the fund's Morningstar Analyst Rating to Silver from Gold.

As Harbor International shed billions in assets, foreign large-blend category peer Vanguard Total International Stock Index (VGTSX) raked in $30 billion.

Karen Wallace does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.