The flow data for September was not pretty for managers of stock and bond funds. But for those leading alternative and non-traditional strategies, the money came from investors seeking shelter from a bearish market.
Mutual funds, including exchange-traded funds, withdrew $77 billion last month, a sharp change from modest inflows of $4.8 billion in August, according to the latest fund flows report from Morningstar. Taxable bonds, municipal bonds and stock funds were among the categories that saw the most inflows in September, with a focus on certain sectors. Some of the country’s biggest asset managers, including Capital Group’s US funds, T. Rowe Price and Invesco, were hit hard. Vanguard Group and Fidelity Investments saw $3.2 billion and $3.6 billion in outflows, respectively, last month. Vanguard has spent only four months including September in a decade, Morningstar said.
Even funds meant to fight inflation ran out of favor in September. Inflation-protected bonds, bank loans and commodities poured more than $3 billion into assets in the third quarter, the report said.
Alternative and non-traditional stock funds, however, have been able to liven up the recent income stream. Alternative funds and informal equity funds inflowed $1.1 billion and $1.4 billion, respectively, in September. They were among the few that didn’t lose assets last month, even though the two categories have experienced the weakest inflows in more than a year.
Organic growth rates were particularly strong for traditional-equity funds, which stood at more than 2 percent last month and a staggering 63 percent in the 12 months to the end of September.
According to Morningstar, alternative funds and non-traditional equity funds have seen monthly inflows since May 2020 and January 2021. The steady stream of income comes at a time when stocks and bonds have declined amid persistent inflation, rising interest rates and fears of a recession. The S&P 500 lost 25 percent year-to-date through September. The S&P 500 Bond Index, the corporate bond equivalent of the S&P 500, fell 17.5 percent.
The disappointing performance of both asset classes adds to the evidence that investors can no longer rely on traditional 60-40 portfolios. Last month’s cash flow reflected the biggest change. According to the AQR paper released in December 2021, investors should seek additional sources of diversification from funds that diversify into risk equity, long-short equity and multi-asset alternative risk pre-risk strategies in the current market downturn.