Mutual funds and ETFs suffered their first consecutive months of outflows since late 2018, according to new data from Morningstar.
Investors withdrew $39 billion from funds and ETFs in May, following the $93 billion they withdrew in April, making the period the first two-month period of outflows since November-December 2018.
May was also the first month in three years in which ESG funds and ETFs suffered outflows, with investors taking in a net $3.5 billion from these strategies. Earlier this month, Bloomberg data showed ESG equity ETFs were hit by sharp outflows in May, the first time they had returned money in a month since January 2019.
ESG strategies brought in a record $69 billion in new money in 2021, up from $51 billion the previous year, which was also a record. For the first five months of 2022, they took in $7.5 billion net, compared to $35 billion in the same period last year.
Across all funds and ETFs, value funds had better flows than their growth counterparts, liquid alternatives enjoyed big gains and fixed income flows reflected a rotation from inflation protection to deflation expectations.
Certain classes of stocks in the defensive sectors benefited from inflows. These included Consumer Defensive, Utilities and Infrastructure, which brought in $10.4 billion, $5.8 billion and $4.7 billion since the start of the second quarter in April.
Value funds also outperformed growth funds in terms of organic growth for the month of May. Foreign SMID Value, Large Value and Large Blend all experienced modest organic growth of less than 1% each, while Foreign SMID Growth, Foreign Large Growth and Foreign SMID Blend all recorded negative growth. Foreign SMID growth was the worst at nearly -4% organic growth.
Additionally, Dimensional Fund Advisors took in $2.7 billion for the year to May, a marked reversal from the loss of assets in 2020 and 2021. The firm specializes in index funds that lean toward value stocks, which were massively out of favor for more than a decade until the end. year.
Dimensional has a new lineup of ETFs and, following flows to these and other funds, has overtaken Franklin Templeton as the ninth-largest fund family, according to Morningstar.
Morningstar also noted that the Russian invasion of Ukraine as well as weaker equity markets in general contributed to international equity funds suffering their first monthly outflows (about $9 billion) in the past 18 last months.
It may also be that the soaring dollar has significantly hurt US investors in foreign equity funds that do not use currency hedging. US rate hikes have sent the dollar on a torrid run since the start of the year.
Alternatives Prove Popular
Investors seeking to avoid losses in traditional stock and bond funds also rewarded liquid alternative categories with inflows.
Equity Market Neutral, Derivative Income and Systematic Trend recorded organic growth rates of 14.8%, 8.7% and 7.9% in May. The three categories have also experienced meteoric organic growth since the beginning of the year of 71%, 51% and 34%.
The Market Neutral category has doubled in size over the past one-year period, while derivatives revenue has nearly tripled with organic growth of 190%.
Funds issued by AQR, founded by Cliff Asness, fall into these categories and have had record years, as Citywire previously reported. Asness and his colleagues benefited from being overweight the value factor after its long period of underperformance. Normally, funds weight each factor equally.
Bond investors now fear… deflation?
In fixed income, taxable bond funds lost $39 billion in May. Despite this, government bond funds brought in $10.8 billion. Additionally, long-term treasury funds raised $20.7 billion for the year.
Long-term Treasury funds have taken a beating as the Federal Reserve embarked on a rate hike regime, and perhaps investors are betting the worst is over, or the Fed may have to halt increases if they induce a sufficiently severe recession.
Similarly, bank loan funds, which provide inflation protection in the form of variable-rate, below-investment-grade business loans, have returned more than $2 billion for the period since the start of the year after taking in around $25 billion in 2021.