December 14, 2018

Record Breaking Weekly Mutual Fund Flows: Capitulation or Transitory?

by Tom Roseen.

For the Lipper fund-flows week ended December 12, 2018, we reported two record weekly flows figures. While the headline numbers showed that investors were overall net purchasers of fund assets (including conventional funds and ETFs), injecting $21.3 billion for the fund-flows week, we noted that the only recipients of net new money were money market funds, attracting a net $81.2 billion (their largest weekly net inflows on record).

However, we also reported that investors were net redeemers of equity funds (-$46.2 billion, just shy of twice the net redemptions of any other week going back to 1992), taxable fixed income funds (-$13.4 billion), and municipal bond funds (-$317 million). While investors were rattled by uncertainty surrounding trade talks, Brexit and Italy, and wild market swings, we questioned the sheer magnitude of outflows out of equity and fixed income funds and inflows into money market funds seen last week.

We were not able to identify any culprit funds or fund complexes that contributed to the large outflows this week. The outflows appeared to be evenly spread over the many different classifications. For example, the major losers of money on the equity side were large-cap funds (-$23.3 billion), international funds (-$8.3 billion), mid-cap funds (-$5.2 billion), and global funds (-$1.9 billion). On the fixed income side, the big losers were flexible funds (-$7.2 billion) and corporate investment-grade funds ($3.7 billion). However, we hypothesize that there are a number of year-end issues that might contribute to these changes. Some might be transitory.

It is probable that some mutual fund investors might have finally thrown in the towel after watching some of the recent market dips, political turmoil, and trade disagreements—a final act of capitulation. However, at year end, especially with the recent market declines, some investors might be doing tax loss harvesting, that is selling their losers to offset taxes on both gains on other issues and income distributions. In addition, many pundits said mutual funds might experience capital gains distributions in 2018 that are in line with, or higher than, in years past, adding insult to injury to the recent market declines. So some investors might be selling the fund before the distribution is made—occasionally this selling decision is less costly than paying the tax on long- and short-term capital gains passed through by the fund.

Last, we noted that several funds went ex-dividend on December 12, paying out capital gains and income distributions for 2018 and possibly causing a temporary one-day decline in total net assets. As a result, we might see a reversal of some of those “record outflows” when the money is reinvested back into the funds on December 13.

After a fund goes ex-dividend on a given day, the total net assets fall on that day by the amount of the distribution while disposition of those payouts are determined (some investors actually take receipt of the payouts), and the remaining amounts are then reinvested back into the funds (automatic reinvestments, aka DRIPs) on the next day.  So we expect that next week we might see net inflows, which could offset some of those outflows, ceteris paribus.

In our view, the large weekly outflows might be due to unique timing issues we experience each year when distributions are paid out at year end, along with the probability that some investors are ducking for cover and protecting their hard won profits in a time of uncertainty.

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