Active managers suffer ‘horrific’ outflows as bond funds falter

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Active funds lost $118 billion in assets in the first quarter of 2022, their worst outflows since the first three months of 2020, when the Covid-19 pandemic began in earnest and financial markets crashed.

It was the second consecutive quarter in which active funds suffered net outflows, but much worse than the $14 billion they returned in the last three months of 2021.

This period ended a streak of six consecutive positive quarters – from Q2 2020 to Q3 2021 – for active funds, during which they gained $358 billion.

It was the longest consecutive period of quarterly inflows since the six-quarter period from early 2010 to the second quarter of 2011 more than a decade ago.

Active fund flows (in billions of dollars)

Source: Morningstar Direct / Data through March 31

Passive funds, on the other hand, took in $203 billion in the first three months of 2022, the sixth straight quarter in which they took in $150 billion or more. Passive funds have seen positive inflows every quarter since 2010.

The $321 billion difference in flows between active and passive funds in Q1 is the largest disparity since Q1 2020, when the gap was $335 billion, when active funds returned $285 billion. and passive funds gained $50 billion.

Investors shun bonds

Citywire USA - YTD Active Funds Flow April 2022 Chart 1

Source: Morningstar Direct / data through March 31

The category with the most active outflows was high growth, from which investors withdrew nearly $25 billion, accounting for more than 20% of all active outflows.

But active equity funds, especially US large caps, giving money back is not a new phenomenon. What’s new, or at least different from the recent trend, is investors making money from active bond offerings.

In 2021, the top active categories of inflows were short-term bonds, bank loans, and intermediate core bonds, which brought in $55 billion, $44.2 billion, and $38.5 billion, respectively.

Ahead of the inflation surge that began in late 2021, investors showered active bond funds with assets in hopes of beating the paltry yield offered by major investment-grade indexes.

Leading bank loans

Citywire USA - YTD Active Funds Flow April 2022 Chart 2

Source: Morningstar Direct / Data through March 31

The only bond category among the winners for Q1 2022 inflows was the bank lending peer group, which took in $20 billion for the quarter.

Bank loans offer interest that floats with various benchmark rates, making them largely insensitive to inflation. They come with credit risk because they are usually issued by companies with an overall credit rating below investment grade, but, until now, investors have been willing to accept the risk of credit to protect against rate hikes.

The category with the second highest active entries was Commodities Broad Basket, earning $6.4 billion in new money. The rest of the top 10 list was made up of non-traditional equity and bond categories such as options trading, derivatives income and systematic trending, as well as two more mainstream equity categories, emerging markets. diversified and large foreign mixtures.

Adam Sabban, senior manager research analyst at Morningstar, said “the resurgence of active funds in 2021 was driven by flows into fixed income”. US stock flows for active funds are still abysmal. So what you’re seeing this year is what it looks like when bond funds aren’t masking what’s going on.

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