What Fund Flows Are Telling Us About Investor Sentiment

Additional content provided by Kent Cullinane, Analyst, Research.

With September and the third quarter (Q3) behind us, we conducted a deeper dive into fund flows over these periods. Flows measure the net movement of cash into and out of investment vehicles, such as mutual funds and exchange-traded funds (ETF). We analyzed flows to gain insights into investor demand and sentiment surrounding asset classes, sectors, and other classifications of markets.

Morningstar Category Flows

When looking at Morningstar category data in September, large blend equities experienced the largest inflow at $24.5 billion. This continues a trend we’ve seen throughout Q3 and this year, as the large blend category is the top category in terms of flows over the trailing Q3 and year-to-date (YTD) periods, experiencing $60.8 billion and $132 billion, respectively, in inflows. Following large blend equities, were a multitude of core and spread sector bond categories. Intermediate core and intermediate core-plus bonds rounded out the top three categories in terms of flows, raking in $12.1 billion and $8.0 billion, respectively. Like large blend equities, intermediate core and intermediate core-plus bonds have been a favorite category for investors this year, ranking second and third over the YTD period, gathering $94.8 and $45.9 billion, respectively.

Looking at the other end of the spectrum, large growth funds experienced the largest net outflows of $7.8 billion in September. After another strong month, with the Russell 1000 Growth Index up 2.9%, it appears investors may be taking profits and rotating into a broader large-blend portfolio. Following large growth were moderate allocation and intermediate government bond funds, experiencing $4.4 billion and $3.3 billion, respectively, in outflows. Moderate allocation funds remain the top category by outflows YTD, experiencing outflows of $26.8 billion, and the second-largest category by outflows in Q3, losing $12.1 billion. Intermediate government bond funds lost assets as yields continued to fall in September, with the benchmark 10-year U.S. Treasury yield bottoming at 3.60%. While intermediate government bond funds experienced outflows in September, they remain the eighth-highest category by inflows over the YTD period.

Core and Plus Sector Bond Categories Experienced Meaningful Inflows in September

Top Ten and Bottom Ten Net Asset Flows Across Morningstar Categories (Trailing One-Month AUM, $ Billions)

Source: LPL Research, Morningstar Direct 10/15/24
Disclosures: Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.

Sector Flows

When looking at individual equity sector data in September, the real estate sector saw the largest inflow with a $1.7 billion gain. Real estate also outpaced all other sectors in Q3, experiencing $3 billion in inflows. It’s no surprise the real estate sector has seen meaningful inflows considering the sector returned 17.1% in Q3, making it the second-best-performing sector over that period. Strong flows over the last few months helped flip the sector to net positive for the YTD period, albeit marginally at $1.3 billion. Following real estate is consumer defensives, gaining $735 million over the month. Flows into this sector could be a sign of caution, with volatility potentially picking up on the heels of the U.S. presidential election. Consumer defensives also experienced positive inflows over Q3 but remained net negative YTD.

Conversely, financials experienced the largest outflow in September at $3.1 billion. Financials were one of three sectors that finished September in negative territory, down 0.6%. While this sector’s performance was underwhelming in September, financials outperformed the broader market in Q3 (up 10.6%) and YTD through September 30 (21.8%). The impressive trailing three-month and YTD performance has led to positive flows in both periods. Following financials was technology, with $2.2 billion in outflows. While the sector experienced outflows in September, technology remained the top sector by inflows YTD by a significant margin, gaining $18.3 billion, with the next closest sector, industrials, only gathering $1.3 billion.

Real Estate Remains Top Sector By Inflows in September

Net Asset Flows across Morningstar Sectors (Trailing One-Month AUM, $ Billions)

Source: LPL Research, Morningstar Direct 10/15/24
Disclosures: Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.

When comparing the latest LPL Research Strategic and Tactical Asset Allocation Committee (STAAC) views with the September flows data, there are some similarities. The top asset class by inflows in September was large blend equities. The STAAC has a slight overweight to large cap equities over small, with the tilt coming more from large growth equities than large value. While large caps are more expensive than small caps from a valuation perspective, earnings power and quality, coupled with impressive technicals, outweigh their relative steep valuations. Following large blend equities, were intermediate core-plus and intermediate core bonds. In fixed income, the STAAC maintains a neutral duration view, favoring core fixed income broadly over cash, as the risk-return trade-off is attractive relative to history.

From a sector perspective, the STAAC is underweight the top sector by inflows, real estate, despite strong performance in September driven by a drop in interest rates, reasonable valuations, and an improving technical set-up. While the STAAC remains underweight in real estate, the relative trend has been positive as valuations remain attractive and technicals continue to improve. The STAAC remains neutral on the top sector by outflows, financials, following disappointing performance in September.