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Investors Cut Risk in October

Monthly fund outflows were the highest they've been in more than three years.

  • October's $29.1 billion in long-term outflows were the greatest since August 2015, which saw $30.3 billion of outflows. These outflows represented 0.15% and 0.22% of long-term assets, respectively. So, while the dollar flows are large, their impact on overall assets is relatively small. The $102 billion that exited long-term funds at the height of the global financial crisis in October 2008 represented 1.4% of assets, or nine times as much as October 2018's outflow, percentage-wise.

  • In contrast with recent history, fixed-income funds were hit much harder than equity. A combined $19.2 billion left taxable and municipal bond funds, while just $2.2 billion fled equity funds. 

  • Taxable bond funds had their worst month since December 2015 with $14.2 billion in outflows, perhaps due in part to September's Fed rate hike. Ultrashort bond funds likely benefited from this hike, though, and collected a record $11.3 billion in inflows. Meanwhile, high-yield bond funds were hit with $7.3 billion in outflows. Municipal bond funds also had their worst month since December 2016. 

  • The allocation-fund rout continues with another $9.0 billion in outflows, the worst month since December 2015. 

  • Active funds had their worst month since December 2016 with $46.0 billion in outflows. Similarly, passive inflows were modest, especially if the sector and leveraged groups are included. Across all four groups, passive collected $16.9 billion. 

October's $29.1 billion in long-term outflows (that is, non-money market mutual funds and exchange-traded funds) showed that investors aren't immune to market conditions. With the Fed raising rates in late September and the S&P 500 falling 6.9% in October, investors turned cautious. The outflows were the most severe since August 2015, the last time the U.S. equity market was in the midst of a correction. Back then, falling oil prices and energy stocks led the decline. Energy stocks are at the tip of the spear once again as oil prices fell into another bear market, but this time around, technology shares are also feeling pain.

Nevertheless, in contrast with recent history, bond funds fared much worse than equity funds in October. (The allocation-fund rout continued with another $9.0 billion in outflows, the group's worst month since December 2015.) Taxable-bond funds had their worst month since December 2015 with $14.2 billion in outflows, while municipal-bond funds had their worst month since December 2016 with about $5.0 billion in outflows. (Taxable bond funds held $3.0 trillion in Nov 2015. By September 2018 these funds held $3.9 trillion, so the comparison of absolute flows must be understood in this context.)

Taxable-bond flow estimates were thrown off by transfers within Fidelity fixed-income funds (see our full report for details), but the overall trend was clear: Investors cut risk in October. With short-term rates rising, ultrashort funds became increasingly appealing. Ultrashort funds collected a record $11.3 billion. Meanwhile, investors pulled $7.3 billion from high-yield funds, the second-worst month in the past 12. Even though the average high-yield return is up a bit over the past 12 months, investors have pulled about $36.3 billion from such funds, a negative 11.3% organic growth rate.

Despite October's volatility, equity fund flows were relatively resilient. As has been the trend in recent years, core strategies fared best. U.S. equity funds collected $3.6 billion, thanks almost entirely to the $14.5 billion contribution from large-blend offerings, which led all Morningstar Categories. Passive large-blend funds not surprisingly dominated these inflows (more detail below). Similarly, the $6.8 billion deposited in international equity funds owed to the $9.2 billion steered to foreign large-blend funds. Keep in mind that performance for the average foreign large-blend fund has been dreadful, losing 8.2% in October alone.

Download the complete Asset Flows Commentary here.