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Commentary

Fund Flows: Investors Focus on Core Strategies

Cash piled into bond funds in March, and the market share of passive strategies among U.S equity funds reached 49%.

Note: This is an excerpt from the Morningstar Direct U.S. Fund Flows Commentary for March 2019. The full report can be downloaded here.

Long-term flows of $44 billion in March 2019 capped a solid first quarter. First-quarter long-term flows were $136 billion, which matched 2018 and were a bit above the $128 billion 2009-18 average. On balance, about $49 billion of the month's long-term flows came from passive vehicles, while active funds had about $5 billion in outflows. Money market funds had modest outflows of $13 billion, the group's first since September 2018. For the quarter, active funds had organic growth of 0.17%, the best in four years, although it was modest in absolute terms. By comparison, long-term passive funds had organic growth of 2.01%, a bit below the five-year trend. 

Cash continued to pile into bonds in March with $35.3 billion going into taxable-bond funds and $8.8 billion into municipal-bond funds. This was the best quarter for muni-bond funds since 2009's third quarter. They collected more than international-equity funds over the past 12 months: $27.8 billion versus $24.4 billion. Bond funds enjoyed strong returns across both groups as investors took comfort from the Fed's decision to pull back on rate hikes. The particularly strong interest in munis possibly owed to attractive valuations relative to Treasury bonds heading into 2019; investor expectations for higher future tax rates may have also contributed.

Overall, taxable intermediate-term bond funds fared the best of any Morningstar Category, with $18.7 billion in March inflows and nearly $42 billion for the first quarter. These strong flows reflected the continuing popularity of core-oriented strategies, with large-blend funds collecting $16.5 billion in March, followed by $5.0 billion for foreign-large blend funds and $4.6 billion for muni-national intermediate funds.

Other key takeaways from this month's fund flows report include:

  • Equity demand remained weak with U.S. equity funds collecting $6.2 billion in March, while international-equity funds took in just $1.3 billion. But, while overall equity demand was weak, passive U.S. equity demand was strong, and its market share hit 49% and could hit 50% in the third quarter.
  • Among strategic-beta funds, risk-oriented (especially low-volatility) strategies fared best with $8 billion in inflows for the quarter, although growth has generally slowed for strategic-beta funds.
  • Vanguard regained its momentum and dominated with $62 billion in first-quarter flows, which were more than its next three competitors combined. Its total U.S. assets crossed $5 trillion.