Investors Swap Long Funds for Money Markets

Note: This is an excerpt from the Morningstar Direct U.S. Asset Flows Commentary for December 2018. The full report can be downloaded here.

• Long-term U.S. funds had their greatest monthly outflows since October 2008 at $83 billion, and inflows for the year were the lowest since 2008. Meanwhile, money market funds had strong December inflows of $57 billion, capping their best year since 2008.
• December outflows spanned asset classes, with U.S. equity funds the only major group showing significant inflows--$14.1 billion despite December's sell-off. On balance, these inflows went to passive funds.
• December's outflows mostly came from actively managed funds, with investors pulling a record $143 billion, while passive funds collected nearly $60 billion in inflows. American Funds suffered the most with $8.7 billion in outflows, the fund family's most since December 2011.
• Taxable-bond funds had their greatest outflows since June 2013, $43 billion, as investors continued to cut credit risk and seek shelter among high-quality, short-duration vehicles. Intermediate-term bond funds got hit hardest with $17.0 billion in outflows, the Morningstar Category's worst month since August 2013.
• International equity, sector equity, allocation, and alternative funds all had their greatest outflows in at least 10 years in December.
• IShares dominated December flows with a firm-record $36.1 billion, more than triple that of runner-up Vanguard's $11.4 billion in inflows. Vanguard still came out ahead for 2018 with nearly $161 billion in inflows to iShares' $136 billion.

Long-term U.S. funds had $83 billion in outflows this month, the greatest since the depths of the credit crisis in October 2008 with $103 billion. However, December's outflows were much less severe as a percentage of total assets, representing 0.46% of nearly $17 trillion in total assets, compared with October 2008's outflows representing 1.43% of nearly $6 trillion of total assets. For all of 2018, long-term funds collected $157 billion in inflows, less than half the $350 billion average for 2008-17. It was also the lowest calendar-year total since 2008, falling just below 2016's $166 billion.

December outflows spanned asset classes, with taxable-bond funds faring worst. U.S. equity funds, which saw notable inflows, were the exception. Meanwhile, money market funds had strong inflows of $57 billion, capping their best year since 2008. In 2018, they collected nearly $162 billion versus $594 billion in 2008, and their 5.7% organic growth rate beat any of the long-term categories.

Actively managed funds had record outflows of nearly $143 billion in December. Passive funds generally gained at their active counterparts' expense, though perhaps not to the degree expected, as they collected nearly $60 billion in inflows. For the year, active funds had about $301 billion of outflows, just shy of 2016's $320 billion. That said, active exchange-traded funds continue to grow in popularity and had their strongest year yet with $27.8 billion in inflows. Passive funds collected $458 billion, lagging 2017's record $663 billion. At year end, actively managed funds had overall market share of 61.2% versus 38.8% for passive vehicles.