Investor cutback in new market bets is most severe since 2008
Decline signals that doubts about the direction of global markets are intensifying
The investor pullback from the asset-management industry in 2018 is the most severe since the last financial crisis, a sign that doubts about the direction of global markets are intensifying.
Net inflows for U.S. mutual and exchange-traded funds in the first 11 months of the year fell to $237 billion, according to new estimates compiled by research firm Morningstar. That was down 62% from the yearago period, the steepest decline since 2008. Asset managers attracted a record $629.5 billion in net flows during the same period in 2017, a boom year for the industry. The slowdown in demand poses new challenges to asset managers, especially the smallest who lack the heft to compete with entrenched players. Many are already wrestling with a pricing war and market swings tied to trade-policy tensions, interest-rate increases and more muted economic growth.
“This year is going to be a blow to the 10-year average without a doubt,” said Morningstar analyst Kevin McDevitt. Net flows, the difference between new investor dollars and redemptions over a period, are one measure of the asset-management in- dustry’s health.
The biggest shift through 11 months of 2018 is the slowdown of new money into low-cost index funds. The rise of these investment products in the years after the last crisis attracted trillions in new money at the expense of old-fashioned stock and bond pickers, turning firms like Vanguard Group and BlackRock Inc. into Wall Street giants.
For six straight years, new money to funds that mimic broad markets climbed higher than the year before. That trend is reversing in 2018. Through the first11months net inflows to so-called passively managed funds were $393.3 billion, down 37% from the same year-ago period.
The pullback was evident at indexing pioneer Vanguard, which started the first index mutual fund for individual investors more than four decades ago. The firm collected net inflows of $208.3 billion in the 11 months ended Nov. 30, down about 40% from the same yearago period. It was the lowest amount of combined net inflows across index and actively managed strategies during that period for Vanguard since 2013.
“An aging bull market coupled with periods of market volatility, political uncertainty and rising interest rates has led to investors becoming more cautious,” a spokeswoman said. The $5.1 trillion firm, after reeling in more than $200 billion in annual net cash flows over the past five years, is still the world’s second-largest asset manager behind BlackRock.
Active managers have long argued that volatility would help them gain ground on their indexing rivals. But investors continue to take their money out of their funds. Net outflows were $156.2 billion through the first11 months of 2018, the third year of withdrawals for that period out of the last four.
Many investors became more measured in 2018 as more fear gripped the stock market. Net inflows into equity funds fell by 55% in the first 11 months compared with the year-ago period. Net inflows into taxable bond funds—which include highyield debt and bank loans—also fell roughly by the same proportion. That could be a sign of worries about corporate profits and companies unable to pay off debt.
There was also movement into safer bets. Bond funds in fixed-income instruments with very short-term maturities saw all-time record net inflows in November. Net inflows into money-market mutual funds— which typically invest in safer, liquid instruments such as Treasury bills—rose to over $100 billion in the first 11 months of 2018, up from $62 billion in the previous year.