Tracking Asset Flows in 2016: Where Did the Money Go?

Morningstar, a top provider of investment research, recently reported U.S. mutual fund and ETF asset flows for full-year 2016.

I’ll walk through the one-year flows in detail. But, you’ll also be able to see what happened in the months of November and December (Hint: The election results — and performance thereafter — triggered a major turnaround in fund flows.)

Plus, I’ll confirm that the move from “active” to “passive” is still in motion.

Here are the numbers …

Source: Morningstar Direct

Now, let’s make some sense out of last year’s asset flows line by line …

2016 Flow Analysis

U.S. Equity: Minus $27 billion

Domestic growth funds saw major outflows in 2016. Large-, mid- and small-cap growth funds lost a combined $137 billion in assets. Value and blended funds saw net positive flows, but not enough to move the needle positive.

Large-cap growth funds took the biggest hit. They had outflows of $102 billion. Not surprisingly, the average large-cap growth fund was only up +6.5% in 2016.

This was the worst-performing category based on market cap (large, mid or small) and style (growth, value or blend). It’s understandable why investors pulled money and went elsewhere.

Overall, though, it was a good year for U.S. stocks. The S&P Total Market Index, which provides exposure to 90% of the total domestic stock market, returned +12.7%.

Sector Equity: Plus $2 billion

Sectors were a mixed bag. Healthcare funds saw the biggest outflows at $22 billion. On the other hand, the largest inflows went to Real Estate funds ($8 billion) and Industrial funds ($7 billion).

The top-performing sector in 2016 was Energy (+27.4%). The worst-performing sector was Healthcare (-2.7%).

International Equity: Plus $7 billion

Foreign large blend funds saw sizable inflows at $60 billion. So did Diversified Emerging Market funds, with $20 billion of inflows.

But Europe ($26 billion), World Stock ($17 billion), Japan ($9 billion) and China ($4 billion) funds brought international equity net flows down with significant outflows.

No performance-chasing occurred here. The MSCI ACWI Ex-USA Index (All Country World Index ex-U.S.) returned +4.5% last year.

The investment dollars going to foreign stocks are probably a combination of rebalancing and the attractiveness of foreign stocks compared to U.S. stocks. (Cheaper, higher dividend yields and better growth prospects.)

Allocation: Minus $54 billion

A large portion of these outflows are attributable to Target-Date funds in retirement plans (mainly 401(k) plans). Ten of 12 Target-Date fund categories experienced outflows.

The outflows from Target-date funds — and Allocation funds in general — is presumably due to:

  Investors becoming “do-it-yourselfers,” or

  Recent retirees rolling their money out of 401(k)s. (An estimated 9,300 Americans turned 65 years old each day in 2016.)

These groups may have gotten out of the markets due to volatility and underwhelming performance. (All 10 target-date fund categories had negative returns in 2015.)

Target-Date funds performed pretty well in 2016. The average return for all 12 categories was about +14%.

Taxable Bond: Plus $194 billion

Taxable Bond funds easily finished first in positive flows in 2016. Almost all U.S. Taxable Bond fund categories received positive flows.

Standouts were Intermediate-Term Bond funds ($114 billion), Corporate Bond funds ($21 billion), High-Yield funds ($17 billion), Inflation-Protected Bond funds ($15 trillion), Short-Term Bond funds ($13 billion) and Ultra-Short Bond funds ($12 billion).

One notable defector from this group was Nontraditional Bond funds, which lost $21 billion. (Investors may be throwing in the towel “unconstrained” funds.)

With many financial pundits warning “get out of bonds” for years, the Barclays U.S. Aggregate Bond Index returned +2.7%.

Interesting factoid: The worst day for the S&P 500 in 2016 (a loss of 3.6% on June 24) is a greater loss than the worst year for the bond market (Barclays U.S. Aggregate Bond Index) at any time over the last 40 years.

Municipal Bond: Plus $33 billion

Senior investors still like the tax-free benefits of this space. The main categories — Muni National Long funds, Muni National Intermediate funds and Muni National Short funds — all had positive flows of $6 billion, $17 billion and $3 billion, respectively. State-Specific Muni fund inflows added to the total.

In an odd twist to the positive flows, not one of the three major muni fund categories above generated a positive return this past year. They ranged from flat to down -0.4%.

Alternative: Minus $5 billion

Managed Futures funds, a hedge fund approach which typically takes long or short positions in futures contracts, received the biggest inflows of the group at $8 billion.

On the other side of the tracks, Market-Neutral funds, Trading-Leveraged Equity funds and Long-Short Credit funds saw aggregate outflows of $9 billion.

Generally, when everyday investors are content with the returns of stocks and bonds, they don’t need alternatives. Especially, when you tack on poor performance and higher-fee structures. Institutions and financial advisers may disagree.

Alternative funds had a rough year. Bear Market funds were down -42% and Managed Futures funds were down -5.5%.

An outlier was Option Writing funds (+11%).

Commodities: Plus $14 billion

Decent size inflows ($14 billion) went to Commodities funds in 2016. Last year, flows were negative.

The S&P GSCI Index (comprised of 24 commodities from energy, metals, agriculture and livestock sectors) had nice reversals performance-wise last year.

The index was up +11% in 2016, as opposed to the following returns from the five previous years: -33% (2015), -33% (2014), -1% (2013), 0% (2012) and -1% (2011).

All Long-Term: Plus $165 billion

Overall, All Long-Term flows were pretty solid. Albeit, less than last year’s $206 billion.

Donald Trump’s victory over Hillary Clinton also seemed to spark a shift in investor preferences to U.S. equities over bonds …

Post-Election Flows (November and December)

Looking back at the table above you can see a noticeable change in direction for equity and fixed income flows …

As Morningstar said in their report:

The final months of 2016 saw a sharp shift in investor preferences to U.S. stocks and against bonds. Thanks to the record flows into passive U.S. equity funds, the overall inflows tally for U.S. stock funds hit its highest monthly total since April 2000, at $27.8 billion.

Prior to the November election, bond funds were the clear favorite for investors, as they have been for some time.

But after the U.S. election, the bond market sold off amid expectations of fiscal stimulus as a tightening labor market and long-awaited signs of wage growth raised expectations of Federal Reserve rate increases and rising inflation.

Still, taxable-bond funds saw overall net inflows of $14.6 billion in December following net redemptions of $2.9 billion for November.

Also, not evident from the previous table, is the shift from “active” to “passive” is still in full effect …

Active vs. Passive Fund Flows

To refresh, Active funds are professionally managed to outperform their benchmark. Passive funds are designed to track an index as closely as possible.

Passive flows dominated active flows in 2016 …

Source: Morningstar Direct

Last year, $340 billion exited active funds and $505 billion entered passive funds.

This is nothing new. As higher-priced active managers underperformed, investors have grown impatient and switched to easy-to-use and cheaper index funds and ETFs.

This has been an ongoing trend for several years:

Source: Morningstar Direct

Where will money flow in 2017? Follow performance.

If there’s anything to learn from tracking historical mutual fund and ETF flows, flows tend to follow performance.

Grant Wasylik

P.S. More than 9,900 Americans will turn 65 years old each day this year. That means a whole lot of people will be rolling their 401(k) plans into IRAs. I recently wrote about a unique IRA that lets you buy more than funds in it. I’m talking about owning gold, real estate, limited partnerships and more! See if a Self-Directed IRA is right for you here >>

Originally from Pennsylvania, Grant graduated from Juniata College with an economics major and accounting minor. Since graduation, Grant has worked in the investment industry for almost two decades by serving in various roles … Prior to coming to…