Investors Pivot
Back to Mutual Funds
After seeking other avenues to put their money to work
during the five-year period following the 2008 financial crisis, investors have
flocked back to equity mutual funds over the last 18 months. During the
2008-2012 timeframe, equity funds had average annual net outflows of roughly
$86 billion, while taxable bond funds had average annual net inflows of more
than $193 billion. Equity fund net outflows peaked at $200.9 billion during
2008, the year of the financial meltdown, and investors did not completely embrace
equity funds again until 2013, when net inflows of more than $194 billion went
into equity funds. Investors have continued to seek equity funds in 2014.
The net outflows for equity funds from 2008-2012 were in
direct contrast to the five-year period preceding the Great Recession. During
that time, equity funds had average annual inflows of more than $111 billion.
Taxable bond funds also had positive net inflows during that time. Their
results, net inflows of $84 billion per year on average, for that five-year
period were comparable to their inflows over the past 18 months, but
substantially less than their numbers when investors were looking for safe
havens after the financial crisis.
The pivot to equity funds has been very concentrated. Over
the past 18 months, the top 10 Lipper equity fund classifications by total net
inflows account for 90.2% of all positive flows to the equity fund universe.
Investors have shown an affinity for international equity funds during this
time.
Lipper’s International Multi-Cap Core Funds classification,
with positive net flows of more than $68 billion is at the top of the list, and
four of the top 10 increases are found in international equity fund categories.
International equity funds as a whole account for more than 56% of the total
net inflows over this period.
While capturing 56% of the total inflows may not appear to
be a significant achievement when taken on its own, that number gains weight if
we consider the size of the international equity fund universe compared to that
of the domestic equity fund universe. As of the end of June 2014, Lipper data
shows that the domestic open-end fund universe is more than three times the
size of the international fund universe, comparing assets under management.
The same approximate disparity exists between the two
universes if we explore the number of options from which to choose; the number
of unique U.S. open-end equity funds totals approximately 2,500, while the
number of international equity funds stands at roughly 800.
The fact that the size of the domestic open-end equity fund
universe is more than three times the size of the international equity fund
universe indicates that U.S. investors have traditionally favored investing at
home. But international stock funds can be considered an essential part of a
diversified portfolio. International stock funds provide diversification
because U.S. and non-U.S. stocks are impacted by different economic circumstances,
which in turn produce different returns. The increased net flows to
international equity funds may be an indicator that investors are seeking to
diversify their returns after the financial crisis.
Lipper’s Emerging Markets Funds classification grew $34
billion over the last year and a half, representing the third largest increase
among Lipper’s equity fund classifications. Investors are attracted to
emerging-market countries because growth rates there have been generally higher
than for developed markets; in addition, those countries have higher potential
for future growth.
But higher growth rates do not always translate to better
fund returns. While emerging markets have the potential for more economic
growth than do developed markets, the risks that can impact performance are
also more amplified in emerging markets.
The net inflows for international equity funds have not
slowed this year despite the geopolitical unrest the U.S. has encountered
during the first half of 2014. For the year to date, international equity funds
have taken in more than $57 billion, keeping the group on pace to match or
exceed last year’s total net inflows of $105 billion. This data verifies that
U.S. investors have not backed off their recent demand for international equity
funds despite ongoing geopolitical conflicts.
Click
here to access the full article on Financial Planning.