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How Do Investors React in a Crisis? Fund Flows Might Hold The Answer

Despite the best efforts of Wall Street analysts and market commentators, the fates of the US economy, stock and fixed income markets are largely unknown. More than anything, investors are looking for answers.

When uncertainty about the future is high, as it is now, forecasts and estimates can be given only so much weight. To add clarity, investors can look at the recent investment decisions of others, aggregated at the market level, to gain a clearer picture of what investors are actually doing with their money as the coronavirus crisis persists.

Fund flows — the net cash inflow into a fund (purchases) or net outflow from a fund (redemptions) — might yield some of the answers investors are seeking.

Irrespective of fund performance, when a mutual fund or exchange traded fund (ETF) has positive fund flows in a given period, the fund’s managers then have more cash to buy more holdings. The opposite is also true: as fund holders sell shares, fund managers sell out of positions and use the cash to pay redemptions.

This means that theoretically, fund flow data can indicate higher or lower demand for different asset types, depending on which funds have relatively large inflows and outflows.

YCharts’ Monthly Fund Flows Reports compile fund flow data for more than 60,000 mutual funds and ETFs, and are leveraged by advisors, investors and asset managers for investment decision-making. If you’re a YCharts Professional client and want monthly fund flow data, subscribe here. Not a YCharts user? Get in touch here.

Top mutual fund inflows and outflows

Despite record-high volatility, the Foreign Large Blend and Large Blend categories were popular among fund investors in March 2020. The broad move into equities was likely caused in part by portfolio rebalancing after stocks sold off in late February and early March, as investors try to get closer to their target allocations.

Meanwhile, taxable Money Market funds have seen inflows of $1.2 trillion over the last twelve months, the largest of any fund category.

Also of note, funds in the Target-Date 2050 category uniquely broke into the top five categories for most inflows. Assuming a retirement age of 65, does that imply investors in their 30s saw a buying opportunity?

mutual fund flows in

Looking at outflows, notable fixed income categories saw the most redemptions in March.

Throughout the end of 2019, Intermediate Core and Core-Plus Bond funds regularly led all categories with the most inflows. Since the start of 2020, that script has flipped. Is this another side effect of portfolio rebalancing? Or perhaps investors are more bullish at recently reduced prices for both stocks and bonds?

mutual fund flows out

Top ETF inflows and outflows

ETF flows mirrored some trends exhibited in mutual fund flows, but they were unique in other ways.

Like mutual funds, the Large Blend category saw relatively large inflows in March 2020, but the volume in ETFs is more than 3-times that in mutual funds. Investors obviously still prefer passive ETFs for their equity exposures, as evidenced by net positive flows of $12.1 billion into SPY in March alone.

ETF fund flows in

Cash inflows into Corporate Bond ETFs also stood out. As US Treasury rates move lower, are investors moving out of Government Bond categories in hopes of superior yields in corporates?

etf fund flows out

Equity style fund flows and performance

The table below shows a summation of mutual fund and ETF fund flows, plus average category performance for the nine equity style boxes.

Despite equities selling off sharply in March, investors rushed into Large Blend mutual funds and ETFs. There wasn’t as much demand for Mid-Cap and Small equity funds, but this typically happens after market corrections as investors try to “upgrade” their portfolios and buy blue chip stocks.

In terms of performance, only three fund categories had positive returns in March, none of which were equity categories. The Short, Intermediate, and Long Government bond categories returned anywhere from 0.6-2.1% in March. Such poor performance across all asset classes illustrates the extent to which coronavirus has impacted markets and the economies.

equity style box fund flows

Turning to research in times of uncertainty

There’s a lot of uncertainty and varying opinions about the stock and bond markets right now. Still, investors’ constant goal is to protect and grow their savings.

With breaking news stories and talking head opinions every hour of every day, it’s hard to sort out the facts. As such, the best path forward is one that uses investment research to make data-driven decisions.

Looking at market data and “crunching the numbers” is more important than ever, as investment decisions made now are likely to have a relatively larger impact on lifetime investment performance.

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