Long-Term Fund Outflows Amid Volatility Triple '08 Figures

Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it. Note: This is an excerpt from the Morningstar Direct U.S. Asset Flows Commentary for March 2020. Download the full report.

The World Health Organization declared the novel coronavirus a pandemic on March 11. As the contagion affected people and economies around the world, U.S. equity markets fell sharply, with the S&P 500 down 24.2% for the month through March 23.

As equities and pockets of the bond market sold off in March, long-term funds suffered record monthly outflows. Investors pulled $326 billion from mutual funds and exchange-traded funds. In contrast, during the global financial crisis, monthly outflows peaked in October 2008 at $104 billion.

Investors fled to safety and parked their cash in money market funds, pouring a record amount of $685 billion into these investment vehicles.

Despite the turmoil in equity markets, long-term U.S. equity funds attracted $10.5 billion in net inflows during March. Passively managed equity funds accounted for virtually all the inflows, soaking up $41 billion. More than $12 billion of that went to SPDR S&P 500 ETF SPY, just one month after its worst-ever outflows. Active managers, on the other hand, struggled. Investors withdrew a net $31 billion in March. That's a continuation of long-term trends independent of the market's movements.

Taxable-bond funds suffered record outflows of $240 billion, the greatest outflow for any asset class in March. Investors turned their backs on intermediate core-plus funds; these funds court more credit risk than their plain-vanilla core peers, so investors who had flocked to them seeking extra yield might have been spooked by the sell-off in credit markets.

Outflows hit muni-bond funds as well. The economic shutdown raised concerns about decreased tax revenue and cash flows. State budgets, for example, could face significant strain from lower sales and income tax receipts just as distributions for unemployment insurance and Medicaid increase. As a result, investors pulled a record $45 billion from muni funds in March.

Bond-fund redemptions hammered the big fund families. Fidelity led all fund families with $39 billion of outflows from its long-term funds in March (2.3% of its February total net assets), with nearly $23 billion coming out of its taxable- and muni-bond offerings. For only the second time in 10 years and just the fifth time since 2000, Vanguard's long-term funds experienced net monthly outflows. As with many peers, bond funds were to blame.