Fund Flows Not Quite What They Appear

Constant reminders of the perpetual net outflow of dollars from domestic equity mutual funds and the subsequent piling of dollars into bond mutual funds leads us to the seemingly obvious conclusion that equities are out and bonds are in.... especially for the retail investor. Despite these patterns, investors remain heavily invested in U.S. focus equity mutual funds; while dollars are obviously flowing heavily into bond funds, they’re also flowing into other varieties of equity funds. On the next few pages we take a deeper look into where retail dollars are residing and flowing within the U.S. investment industry.

Normalizing Fund Flows—Domestic Equity Mutual Funds Still King

When taking into account the vast amount of capital still residing in domestic equity mutual funds, out- flows appear less overwhelming.

The Rise Of Index Funds In All Corners

Despite persistent net outflows from the domestic equity mutual fund category, there has been positive flow into the indexed equity fund subset.
What Outflows? Most Fund Genres Experiencing Net Inflows

  • A major focus in the media has been the high level of net outflow from U.S. focus equity-only mutual funds. While this is indeed the case to an extent, the chart below gives us a more thorough, holistic visual on what is occurring among a broader range of investment vehicles.

Some may be fairly surprised to see that beyond net outflows from U.S. focus equity mutual funds and money market funds, all other fund genres (not just bond mutual funds and ETFs) are experiencing net inflows. And if net outflows from U.S. focus equity mutual funds still seem staggering, let’s offer several other perspectives....

  • Estimated 2012 net outflows for U.S. focus equity mutual funds stand around $86 billion. Combining YTD flows for U.S. equity ETFs and foreign focus ETFs alone sums to net inflow of nearly $78 billion, only $8 billion shy of U.S. equity mutual fund net outflow.
  • Also noteworthy are the consistent net inflows into hybrid mutual funds (such as asset allocation and flexible funds with mixed exposures to equity and fixed income investments). These funds, which likely have north of 50% of assets invested in equities, have seen estimated net inflows of $42 billion YTD, half the net amount flowing out of U.S. equity mutual funds.

  • The overall point is emphasized further on the chart above which depicts cumulative net flows since both 2000 and 2007. Here the outflows look even less daunting. Since 2007, U.S. equity mutual fund net outflows sum to around $550 billion. U.S. equity ETFs and foreign focus mutual funds have cumulatively collected net inflows of $566 billion over this same time period.
  • Netting out 2007-to-date U.S. equity ETF inflow with U.S. equity mutual fund outflow leaves net outflow at about $150 billion; $150 billion accounts for only 3% of total net assets held in U.S. equity mutual funds and ETFs (which totals nearly $5 trillion in net assets as of August 2012).

Normalizing Fund Flows - Domestic Equity Mutual Funds Still King

According to data compiled by the Investment Company Institute (ICI), as of August 2012, total net assets within the U.S. investment industry (including all types of mutual funds and ETFs, excluding closed-end funds and UITs) summed to a massive $13.76 trillion. The chart below breaks out each fund subset by total net assets, once again leaving us with a very different perspective of outflows relative to the underlying assets within each fund genre. When taking into account the vast amount of capital still residing in domestic equity mutual funds, outflows appear less overwhelming.

Despite over $550 billion exiting this fund subset cumulatively since 2007, domestic equity mutual funds still clearly dominate the industry (31% of total industry assets), even as bond mutual funds have accumulated an additional $1.12 trillion net inflow over the same time period. So far in 2012, only about 2% of assets have flowed out on a net basis from U.S. equity mutual funds compared to the +7% additional inflow that has been committed to bond mutual funds.

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