Equity funds suffered in 2015News added by Benefits Pro on January 20, 2016

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By Marlene Y. Satter

U.S. equity mutual funds may have seen inflows during the month of December, but they ended 2015 down, with net outflows that totaled $169 billion for the year.

According to a Morningstar report, active funds on the whole were scorned by the markets.

All active categories except municipal bond funds sustained outflows for the year, with taxable bond funds having outflows at the end of 2015 of $71.0 billion.

“In terms of performance,” Morningstar wrote, “2015 was far from stellar, with the S&P 500 almost flat with a 1.4 percent return and the MSCI EAFE index in negative territory, at negative 0.8 percent. In terms of flows, U.S. equity funds experienced an outflow after two years of inflows, while the largest inflow went into international-equity funds.”

Considering how poorly international did during 2015, the size of that inflow appears to indicate a look to the future, it said.

Investors anticipate greater growth potential from Europe and Asia than from the U.S., taking into account the potential for interest rate increases at home and the European Union maintaining quantitative easing measures.

Morningstar also pointed toward another trend: a large portion of flows coming from funds-of-funds, particularly retirement plans, target-date, and target-risk funds, and moving instead into international equity, increasing their allocations to the sector.

“A majority of these large international-equity flows we’ve seen come through the retirement channel,” Morningstar wrote, adding that Vanguard, as an example, has been enhancing target-date fund diversification by increasing exposure to international equity.

High-yield bonds have suffered, finishing in the bottom five, the report said, for three out of the past four months. It didn’t help, of course, that Third Avenue Management’s announcement that it would liquidate its high-yield bond fund, Third Avenue Focused Credit, without allowing investors to redeem their shares right away, made for bad news at the end of the year.

That, along with decreasing oil prices, resulted in December recording the third largest monthly outflow for the category, $11.2 billion, since Morningstar’s data began in 1993.

But oil prices played their role, too, in the category’s poor performance, “since many high-yield bonds come from the energy and basic materials sectors.” As oil prices fell, the risk of bankruptcy to the underlying companies rose, driving investors away.

Originally posted on BenefitsPro.com
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