HomeBlogInvestmentMarket sell-off puts mutual funds on track for $1 trillion of outflows in 2022

Market sell-off puts mutual funds on track for $1 trillion of outflows in 2022

The current economic, geopolitical and financial markets backdrop is so unsettling that it might not surprise anyone to learn that money is gushing out of mutual funds at a record clip. But this could be a tipping point for asset management.

With $25 billion worth of outflows last week, bond mutual funds are coming off their worst week of the year. So far this year, outflows for all mutual funds total $740 billion. and with both stock and bond funds bleeding assets there’s potential for outflows to hit the $1 trillion mark, which would double the record outflows of 2020.

“These are massive numbers, but people don’t pay that much attention because mutual funds aren’t the new shiny thing anymore,” said Eric Balchunas, fund analyst at Bloomberg Intelligence.

While some are suggesting the flows out of the $20 trillion mutual fund space are benefitting the more popular $6 trillion ETF space, Balchunas believes it’s not that straightforward.

“Typically, older investors are using mutual funds and my guess is they’re just taking money off the table and putting it into CDs and cash,” he said. “I don’t think there’s a ton of people taking money out of mutual funds and putting it directly into ETFs.”

With the S&P 500 Index down nearly 24% this year. the real damage to the size of the mutual fund space has been the market decline, which has shrunk the category by more than $3 trillion. But the record-level outflows raise questions about selling low.

“Due to geopolitical and domestic issues, we’ve seen investor reactions place pressure on markets,” said Andrew Fincher, an adviser at VLP Financial Advisors. “Most of our clients understand this environment but we do get some clients that want to move to cash.”

Andy Cole, founder of Laminar Capital Management, describes the rush to cash as an attempt to time the market.

“We have no way of knowing if stocks and bonds will continue to dip or if the worst is behind us,” Cole said. “All we know for sure is that we can generally earn risk premium over time by investing in stocks, bonds and other risky assets but do so in a way that aligns with our goals and risk tolerance.”

But in unprecedented times, some advisers are finding themselves open to new paths.

“It’s an absolutely rational decision to raise cash in a declining market, especially when the outlook for the next two or three quarters is negative,” said Dennis Nolte, senior vice president at Seacoast Investment Services.

“With nowhere to hide except cash, and cash finally with a pulse regarding yields, money flows where there is a return,” he said. “We had lightened up our equity funds and raised cash in January, then again in August. Our mistake was not being bearish enough.”

Todd Rosenbluth, head of research at VettaFi, said it is becoming easier to justify moving to the sidelines in a falling market now that cash accounts are suddenly paying higher yields.

“Advisers and end clients have moved money in part to harvest tax losses and benefit from the lower costs and often stronger performing index-based alternatives,” Rosenbluth said. “However, some of the money has moved to money market funds, which are holding up better during a rising-rate environment. Advisers are sitting on the sidelines waiting for the economic picture to improve.”

Of course, markets are made by having two sides to every trade.

“I’m not moving any clients to the sidelines, I am doing quite the opposite,” said Erik Baskin, founder of Baskin Financial Planning.

“I am encouraging continued investment and resisting any panicked movements,” Baskin said. “Moving money to the sidelines during a market decline is statistically a horrible move.”

Meanwhile, the trend remains. Regardless of how advisers adjust client portfolios, the tide is moving away from mutual funds.

“While mutual funds are on track to absolutely obliterate their previous outflow record, ETFs continue vacuuming up assets,” said Nate Geraci, president of The ETF Store.

“At this point, you can basically set your watch to mutual fund outflows and ETF inflows during sharp market downturns,” he said. “This year is particularly unique in that bonds are experiencing carnage right alongside stocks.”

Bloomberg Intelligence’s Balchunas said the low cost, tax efficiency and ease of use of ETFs make it difficult to imagine anything but a steady shift away from mutual funds.

“I’ve been saying this for a decade: Bull markets are good for ETFs, but bear markets are great for ETFs,” he said. “Right now, ETFs are about 25% of the total size of the mutual fund space, but in 10 years I’m betting ETFs are 75% and mutual funds are 25%.”

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