Stocks had a banner year in 2020, but mutual funds have not. In fact, open-end mutual funds have been losing in-flows for the past few years while investors stash more cash into alternatives, but not into banks.
Chip Roame of Tiburon Advisors sees the imbalance as dire enough to call his presentation last week “Open-End Mutual Funds: America’s Primary Investment Vehicle Under Threat.”
The threat comes from exchange-traded funds, close-ended funds and even money market funds, which are pulling the cash stream away from open-end mutual funds, specifically stock funds.
Mutual funds are not just the largest investment vehicle in the United States, but also the biggest pile of money that Americans hold — $18.2 trillion.
“There’s more money in open-end mutual funds than there are in bank accounts today,” Roame said. “I believe we’re the only country that can say that.”
Steady But Shifting
The number of mutual funds has been steadily around 8,000 from about 800 companies for at least 20 years. That does not include closed-end funds, such as ETFs or collective investment trusts, which are available only to institutional investors. Each open-end mutual fund has three share classes each, adding up to about 24,000 share classes to choose from.
Mutual funds had $192 billion of net flows in 2020, but most of it went to money and bond funds.
Net flows are the opportunities for fund companies to capture investment, Roame said. Even though last year featured positive net flows, stock and hybrid funds were the biggest losers. Open, bond and money funds had “hugely” positive flows.
“Using just the 2020 data, you could say that the money fund business and the bond fund business are still strong,” Roame said, “but the equity fund and hybrid fund business are certainly under threat.”
Open-end stock funds were 52% of the total in 2020. Over time the stock funds were 38% of the total in 2008, growing to about 55%. They have since dropped to 50%. Despite low interest rates, bond funds took a leap last year, along with money funds.
Stock mutual funds have been taking it on the chin for several years.
“For five years now they’ve been negative and substantially negative,” Roame said. “Stock funds are certainly in net redemptions. And they’ve been there for five solid years now.”
Open-end hybrid funds, which mix debt and equities, have also been down in net flows.
The number of bond funds has been around 2,100 for 20 years, but they have been raking in money over the past several years in net flows, with the exception of 2018.
AUM, however, grew incrementally because of low interest rates.
The number of money funds has plummeted because of regulatory reform, Roame said, dropping from 1,039 in 2000 down to 361 money funds last year. Nevertheless, their assets have held up and have steadily increased over the past several years. Net flows have been gushing into money funds over the past four years.
Not Pretty For Standard Mutual Funds
“It’s a Tale of Two Worlds,” Roame said. “There’s the stock and hybrid world that’s in net redemptions for five or six years. And there’s the bond and money fund world which has been in positive flows for about four years.”
Over the past several years, traditional open-end fund users RIAs and full-service brokerages have been sending less money to those funds, Roame said.
Net flows from defined contribution have been dropping precipitously over the past few years, although their AUM is up.
Roame predicted that the slow market growth in open-end mutual funds will continue with 1%-3% growth over the next five years. Bonds and money markets will continue to take a chunk of that, but other asset classes are stepping in.
“I think the open and bond funds and money funds specifically are in the right place at the right time,” Roame said. “But I think stock funds are being picked off more by ETFs.”
Emerging segments are growing. ETFs, or index mutual funds, had strong growth until 2018, but bounced back in net flows last year, although AUM climbed each year with the strong equities market.
Socially responsible or environmental, social and governance funds are a particularly strong performer.
All of these factors, among others, means it will continue to be a bit of a struggle for open-end funds for the foreseeable future.
Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at firstname.lastname@example.org.
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