Investors Continue to Favor Taxable-Bond Funds

• Estimated long-term flows were $28.2 billion, as U.S. equity funds rebounded with $10.6 billion of inflows and taxable-bond funds led all groups with $20.9 billion, while international equity demand remained light with about $850 million.
• Vanguard led all families with $16.5 billion in inflows, the firm's strongest showing since January.
• Flows are more strategic and less performance-driven. Core funds continue as the most popular categories. Three of the four top Morningstar Categories by flows in September were Core strategies: large-blend, $9.1 billion; intermediate-term bond, $6.1 billion; and foreign large-blend, $3.9 billion.
• Passive funds collected $42.0 billion of inflows and active funds lost $13.7 billion to outflows.
• Outflows have quietly hammered allocation funds, losing $5 billion in September alone and nearly $29 billion year to date.

It appears 2018 will be the third consecutive year that taxable-bond funds receive the greatest inflows among Morningstar's eight U.S. category groups. Investors shoveled $20.9 billion into taxable-bond funds in September, nearing $189 billion during 2018. That's about half of 2017's $390 billion calendar year total, though it's nearing 2016's $196 billion total.

As we have discussed previously, taxable-bond demand seems to fall into three segments. First, investors are moving money into core, intermediate-term bond funds. This category received about $6.1 billion in September and leads all taxable-bond categories with about $55 billion year to date. These inflows may reflect investors rebalancing and shifting money from equity funds. Second, rate-sensitive investors are pouring money into ultrashort-bond funds. This category collected $5.3 billion in September and is just behind intermediate-term bond funds for the year to date with about $54 billion. Finally, long government funds received about $3.6 billion in September inflows. These funds have historically diversified equity portfolios well, but their 2018 success is still surprising. The category has been hammered by rising interest rates, and the average fund is down 8.7% through October 9. Nevertheless, investors have funneled about $15.4 billion into these funds during 2018.

Core strategies are still the most popular across asset classes. For both U.S. equity and international equity, it's core, large-blend funds, and then everything else. Large-blend U.S. equity funds collected $9.1 billion of the group's overall $10.5 billion flows. For the year to date, large-blend funds have absorbed $35.4 billion versus overall U.S. equity's $5.8 billion, meaning the remaining eight categories have experienced collective net outflows this year.

Within international equity, foreign large-blend funds received $3.9 billion compared with the entire category group's $850 million in inflows, implying the remaining categories suffered modest net outflows. For the year to date, foreign large-blend funds have taken in $72.6 billion versus $89.3 billion for all international equity.

Conversely, world large-stock funds had $1.3 billion of outflows in September, the greatest among international equity funds. Investors had little interest in some other world strategies, with world allocation funds losing $2.1 billion in outflows.

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