January 19, 2018

Fund Investors Still Prefer Nondomestic Equity Funds Over Domestic Equity Funds

by Tom Roseen.

Despite strong returns from domestic equity funds (+3.69% so far this year), investors continued to prefer nondomestic equity funds (+4.27%) in the first two weeks of 2018, injecting $8.4 billion into them year to date through the fund-flows week ended January 17, 2018. Meanwhile, they were net redeemers of domestic equity funds (-$6.1 billion for the same period).

This was a continuation of the trend we have been watching over the last several years, where domestic equity funds (excluding ETFs) saw a mass exodus for 2015 (-$161.1 billion), 2016 (-$228.7 billion), and 2017 (-$180.5 billion), while nondomestic equity funds attracted net new money in two of the last three years, taking in $92.6 billion for 2015 and $48.5 billion for 2017.

Our assumption is that Baby Boomers have been moving money from funds that have grown disproportionately large over the last few decades to other less-correlated and underrepresented asset classes in their portfolios. Their core-and-satellite portfolios, which were often more heavily weighted toward domestic large-cap funds, are now being reallocated to world equity funds, taxable bond funds, municipal bond funds, and alternatives funds.

In addition, there has been a lot of buzz in the mainstream media about low-cost passively managed investments outperforming on average their actively managed counterparts. Obviously, this has helped prop up flows into ETFs. Over the same three-year period we have seen domestic equity ETFs take in net new money in each of the last eight years, with ETFs attracting $31.3 billion for 2015, $141.4 billion for 2016, and $142.3 billion for 2017. While nondomestic equity ETFs have not witnessed a net outflow since 1996 (the inception year for the first nondomestic equity ETF), their recent inflows have been slightly more subdued, with nondomestic equity ETFs attracting $76.5 billion for 2015, $4.0 billion for 2016, and $127.4 billion for 2017.

It appears that some investors are still betting on the benefits of actively managed funds when they look for nondomestic equity stock pickers. For 2018 so far nondomestic equity ETFs have taken in some $8.4 billion net, virtually matching their nondomestic equity mutual fund counterparts through the fund-flows week ended January 17.

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