Investors Return to the Table

Long-term funds collected $32.1 billion in inflows in July following June's $22.1 billion in outflows. Taxable-bond funds led the way with $24.8 billion in inflows, with passive funds contributing $17.9 billion. Over the past five years, passive taxable-bond funds collected an estimated $635 billion in inflows, over four times greater than the $149 billion collected by their active counterparts. Active funds usually accounted for any outflows from taxable-bond funds during that time. Over the past 12 months alone, passive market share of taxable-bond funds has grown to 30.4% from 28.6%, compared to active market share which has fallen to 69.6% from 71.4%.

U.S. equity funds had modest inflows of nearly $3 billion, with large-blend funds leading with $5 billion in new money. (This number is greater than the group's overall intake, but keep in mind that overall inflows are reduced by outflows from other categories.) This is in keeping with year-to-date trends as large-blend funds have collected $28.2 billion so far in 2018, with small-growth and small-blend funds following with $7.2 billion and $7.1 billion, respectively. In July, large-growth and large-value funds were the least popular, with $3 billion and $1.2 billion in outflows, respectively.

After strong inflows in 2017, interest in international equity funds has waned in recent months, as the group collected just under $500 million overall in July. As with U.S. equity, foreign large-blend funds dominated the group with $5.1 billion in inflows. After two months of outflows, diversified emerging-markets funds received nearly $600 million. Meanwhile, normally staid world large-stock funds saw nearly $3 billion in outflows, that category's greatest outflows since March 2009 during the credit crisis.

Within the taxable-bond group, ultrashort bond funds once again dominated with about $6.8 billion in inflows, followed by $3.6 billion for intermediate-term bond funds and $3.0 billion for long government funds. This was the fifth consecutive month that ultrashort bond funds led taxable-bond inflows. But, intermediate-term bond funds still lead the group in year-to-date inflows with $46.8 billion versus $38.7 billion for ultrashort bond funds.

Meanwhile, short-term bond and short government funds again received little interest, with about $700 million in combined inflows. In an environment where the Fed is raising interest rates, an investor segment appears unwilling to take interest-rate risk above a certain threshold. Perhaps a flattening yield curve makes going out beyond one year less appealing. That said, not all investors are thinking in these terms, as the solid inflows for intermediate-term bond and long government funds show.

Overall, active long-term outflows weren’t as bad in July as in June, but they were persistent across the board. Active funds had net outflows in every major category group except for taxable and municipal bonds. Across all groups, active funds now have 62.4% overall market share, down from 64.6% year over year; passive funds now have 37.6% market share. If active funds continue losing about 2% to passive offerings each year, in five or so years, active and passive funds will each have about 50% market share.