Historically, money market funds have been the primary safe haven for U.S. investors, with their size showing a clear inverse relationship with the performance of the U.S. stock market.
Over the past decade, the U.S. has experienced two bear markets. The first was the bursting of the technology bubble in 2000, compounded by the September 11 terrorist attacks, which plunged the U.S. stock market into a bear market lasting three years. During most of 2000-2001, money market funds saw a continuous net inflow of funds, with their size rising to nearly $2 trillion. The second occurred in the second half of 2007 when the financial crisis fully erupted, again demonstrating the negative correlation between money market fund size and the stock market.
Funds Favor Fixed Income Funds
Comparing the fund flows after the two bear markets, we find that during the period when the U.S. stock market stabilized and gradually rebounded in 2003, net inflows for most fund categories began to increase; domestic equity funds attracted a significant amount of capital as the market recovered, followed by overseas equity funds, while taxable bond funds showed weaker appeal, even experiencing net outflows in some quarters. In 2004, as the global market recovered, overseas equity funds began to attract attention, leading to capital outflows from the U.S., with net inflows for these funds starting to expand.
Although economic data in 2009 indicated an improvement in the U.S. economy, investors remained cautious, favoring fixed income funds (including taxable bond funds and municipal bond funds). Starting in the first quarter of 2009, substantial capital flowed into these funds. For instance, fixed income funds saw a net inflow of $88.5 billion in the first quarter, with net inflows exceeding $396 billion over the past 12 months. Despite the Dow Jones Industrial Average reaching a new rebound high in the first quarter of this year, equity funds attracted only about $2 billion during the same period, with a cumulative net inflow of $54.9 billion over the past 12 months, a ratio of 1:7.2 compared to bond funds.
Domestic U.S. Equity Funds Lose Favor
Among equity funds, the appeal of domestic U.S. equity funds has significantly diminished compared to 2003. Recently, not only have net inflows been lower than other fund categories, but there has also been a cumulative net outflow of approximately $350 million over the past 12 months. In contrast, most investors believe that overseas markets will perform better in the future, leading them to prefer investing in overseas equities when selecting equity funds. In the first quarter of this year, U.S. overseas equity funds saw a net inflow of approximately $19.8 billion, marking the most significant inflow since the fourth quarter of 2007.
In terms of specific categories, investors continue to chase hot trends while also diversifying to manage risk and share returns from different markets.
For example, emerging markets shone brightly in 2009, with several emerging markets seeing gains exceeding 100%. Diversified emerging market funds averaged an 82% profit over the past 12 months, with investors pouring $21.4 billion into these funds, a 30% increase from the beginning of the period.
Conversely, within domestic U.S. equity funds, large-cap growth and value stocks rose by 50% and 48%, respectively, over the past 12 months, yet these were the two categories with the largest net outflows in the Morningstar classification, with net outflows of approximately $16.4 billion and $14.9 billion, respectively. Conservative allocation funds also saw a 37% increase but experienced a net outflow of $9.1 billion.
These data indicate that fund performance is not the sole reason for attracting capital. A significant inflow into fixed income products shows that even well-performing fund categories cannot retain capital.
Vanguard's Fundraising Ability Leads the Industry
Among the domestic U.S. equity funds that have been abandoned over the past year, actively managed domestic equity funds have shown a notable net outflow. Over the past 17 quarters, actively managed equity funds have mostly been in a state of net outflow, particularly during the 2007-2008 period when outflows were especially pronounced. In contrast, passive management funds have seen inflows every quarter during the same period, even experiencing cash inflows during the bear market of 2008. Over the past 12 months, actively managed domestic equity funds experienced a net outflow of $27.4 billion, while passive management equity funds (excluding sector and leveraged funds) attracted a net inflow of $24 billion.
As a leader in passive management funds, Vanguard has naturally become a primary target for capital inflows. In the first quarter of this year, among the 10 funds with the highest net inflows, Vanguard funds accounted for half, including the Total Bond Market Fund, Short-Term Investment Grade Fund, Total Bond Market II Fund, and Inflation-Protected Securities Fund. The net inflow for passive management equity funds primarily came from the Vanguard Total Return Market Index Fund, which garnered a net inflow of $11.2 billion, accounting for nearly 50% of the total net inflow during the same period, making it the most popular equity fund in the U.S. to date.
Following closely is the Vanguard Institutional Index Fund, with a net inflow of $3.8 billion. Thanks to the popularity of bond funds, PIMCO, as a leader in the fixed income fund industry, has also demonstrated exceptional fundraising ability, with a net inflow of $23.1 billion over the past 12 months, attracting $8.28 billion in March alone, second only to Vanguard.
