Buy low, sell high. It’s a mantra that everyone knows, but that few fund investors seem to follow.
Historically, fund flows go to what’s hot, even if it’s pricey and peaking.
I decided to look at how active fund investors fared in 2017. Where did they put their money and how did it perform?
In terms of flows, it was a better year for active managers. The first and second quarters both brought positive net inflows. When all was said and done, there was a $12 billion outflow from actively managed US mutual funds over the course of 2017. That doesn’t sound great, but it’s considerably better than 2016’s $334 billion outflow. If you add money market and target date funds into the 2017 numbers, then active funds experienced total inflows of $155 billion.
FOLLOW THE MONEY
So where did these flows go? At a category level, fixed income reigned supreme, accounting for four of the top five most popular peer groups for the year.
Leading the pack was Multi-Sector Income, which benefited from the additional gains being made in corporate credits, high yield and emerging market debt. It is also home to the Pimco Income fund, which took in a whopping $31 billion in the US alone and a further $47 billion worldwide.
What’s more, the fund’s performance was strong again, climbing 8.2%. This placed it in the second decile over the year.
It wasn’t even an exception to the rule. In fact, 14 of the top 20 selling funds finished the year in the top two quartiles of their peer groups, with a whole host of them in the top decile.
International equities proved a strong contributor to this trend, with all four of those funds that made it into the top 20 finishing in the second decile of their peer groups or better.
It was heartening to see strong flows here given the large manager talent pool in these categories. The Oakmark International fund took in net inflows of close to $10 billion, second in the overall list for flows and second in its peer group for total returns.
Still, it wasn’t all good news for investors. Flows into domestic equity active funds were understandably low, and when investors did take this route they were not necessarily rewarded.
The only domestic equity fund to make the top 20 for flows was the ClearBridge Large Cap Growth fund, which ended the year near the bottom of the Large Cap Growth peer group.
Overall though, why has it been such a good year for the best-selling funds? For me, it is largely because the parts of the equity and fixed income markets that performed well in 2016 continued to shine in 2017, so if you ran your winners you were likely to stay at the ahead of the pack.