Funds hit by fourth month of outflows, their longest losing run on record

Long-term mutual funds and ETFs endured their fourth straight month of outflows in July, marking the longest stretch of consecutive monthly redemptions since Morningstar began collecting this data in 1993.

According to Morningstar’s latest US Fund Flows report, mutual funds and ETFs shed a combined $13bn in July 2022, a month when the S&P 500 rocketed 9% having tumbled into bear market territory in early June.

The $13bn represented the most benign outflow of the last four months, especially compared to April and June which saw outflows of more than $50bn each from long-term funds and ETFs.

The improved numbers were helped by investors buying back into bonds, which rallied in July. Taxable bond funds stemmed their outflows to just $5.5bn, an improvement on May and June when more than $30bn left these funds.

Municipal bond funds took in $1.2bn, their first inflows since the end of 2021.

The Long-term Government Bond category took in $7.3bn in July, adding to its tally for the year, which is now more than $30bn. This suggests investors are more worried about recession as yields drop and the US Treasury yield curve inverts than they are about inflation.

More than 40 basis points of yield now separate the two-year and 10-year US Treasuries, with the shorter maturity note yielding more, at about 3.1%. Earlier in the year, the 10-year note’s yield approached 3.5% as fears of inflation gripped investors, with the CPI posting 7% to 9% year-over-year increases, the most since the early 1980s. Now the yield has collapsed to less than 2.8% as investors prepare for recession or stagflation. Bank Loan funds, the darlings of 2021 because of their floating-rate features that protect investors from interest rate risk, gave back $5.1bn in July.

US and International Equity funds managed small inflows in July of $2.3bn and $900m, respectively.

Sustainable funds gathered a tepid $120m in July, with flows remaining lackluster since March. The category, typically light on traditional energy stocks, has been less popular this year in the face of surging energy prices through June, a trend that may now be reversing. The price of West Texas Intermediate crude is now below $90 per barrel, off from nearly $125 in early March.

While long-term funds and ETFs were in the red, investors continued to pour money into alternative and non-traditional equity funds. Alternative mutual funds and ETFs are on a run of 27 straight months of inflows, while non-traditional equity funds and ETFs have had inflows for 19 months now. Derivative Income funds have been the standout category, raking in $15.2bn for the year, representing a nearly 67% organic growth rate.