The VIX has also been on a tear. The “fear index” has surpassed 30 a number of times this year, and most recently in early October. The S&P 500 (^SPX) and Bloomberg US Aggregate (^BBUSATR) both hit annual lows to end the quarter even as inflation began to seemingly taper off.
With most investors anticipating additional rounds of rate hikes from the Federal Reserve, mindsets have shifted towards a flight to safety. The market collectively pulled nearly $34.5B from Fixed Income funds and instead parked their cash in Money Market funds.
Fund flows are the net cash inflow into a fund (purchases) or net outflow from a fund (redemptions). Irrespective of fund performance, when a mutual fund or ETF has positive fund flows (or net issuances for ETFs) in a given period, that fund’s managers then have more cash to buy more holdings. The opposite is also true: as fundholders sell shares, fund managers sell out of positions and use the cash to pay redemptions.
This means that fund flow data can indicate higher or lower demand for different asset types, depending on which funds and categories have relatively large inflows or outflows.
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Mutual Fund Flows: Biggest Winners and Losers
Investor sentiment reversed course in Q3 as Money Market mutual funds experienced a surge of $22.1B in net inflows after last period’s $58.2B outflows. Additionally, Target-Date Retirement mutual funds added $16.7B in new assets, a proof point that long-term investors are playing the current market pullback.
Additionally, US investors seemed to have lost some confidence in domestic markets as $4.9B was moved into Foreign Large Blend mutual funds. International stocks have been similarly beat-up in 2022, so this might be read as a diversification trend, or just more opportunistic buying.
Large Growth and Short-Term Bond mutual funds took a hit this past quarter as investors sought to avoid rate-sensitive asset classes. A combined $37B was redeemed from Large Growth and Foreign Large Growth, as well as a combined $33.5B from Short-Term Bond and Ultrashort Bond mutual funds. Overall, the market is expecting tighter economic conditions as the Fed raises rates and reduces liquidity with aims of controlling inflation.
Large Cap ETFs were this quarter’s biggest winners with the Blend, Value, and Growth categories combining for over $60B in net new assets. Despite poor performance year-to-date, or perhaps in response to it, investors continue to flock toward Large Cap funds.
While fixed income has taken a hit year-to-date, investors are still looking to add fixed-income exposure to their portfolios. The move toward Long Government ETFs with inflows of $13.3B indicates investors may be attempting to lock in attractive rates before a potential retracement.
The table below shows a summation of combined mutual fund and ETF fund flows, plus average category performance, for the nine equity-style boxes.
Large-Cap funds have been hit the hardest and are down the most year-to-date in comparison to their Mid-Cap and Small-Cap counterparts. Investors took advantage of the buying opportunity and funneled $30.4B into Large Blend, and opted to pull $13.5B in net assets from Large Growth, a typically less favorable category during high-interest rate periods.
With Q4 right around the corner, tax planning might have been top-of-mind for some investors. There was a clear preference toward tax-efficient ETFs across all equity-style funds and an equal but opposite trend for corresponding mutual funds.
If investors’ actions in Q3 can tell us anything, it’s their anticipation of an impending recession. With significant moves into Money Market, Long Government, and Utilities funds, the market effectively voiced their reservations. These recession-proofing actions were accompanied by opportunistic buying of some equities — could a market recovery precede the economic recession?
Miss our last webinar covering the latest fund flows trends of Q3 2022? Watch the full replay here: