August 2024 Fund Flows Recap

Additional content provided by Kent Cullinane, Analyst, Research.

With August behind us, we conducted a deeper dive into fund flows over the month. 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 insight on investor demand and sentiment surrounding asset classes, sectors, and other classifications of markets.  

Morningstar Category Flows 

When looking at Morningstar category data in August, large blend equities experienced the largest inflow at $15.4 billion. This continues a trend we’ve seen this year, as the large blend category is the top category in terms of flows over the trailing year-to-date (YTD) period, experiencing $107.4 billion in inflows. Following large blend equities, were a slew of bond categories, with long government, intermediate-core-plus, and intermediate core bonds bringing in $7.4 billion, $4.4 billion, and $4.2 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, respectively, over the YTD period, gathering $82.7 and $38.6 billion, respectively. Also worth noting is that fixed income categories made up eight of the top ten categories by inflows in August, highlighting the risk-off rotation in markets. 

Looking at the other end of the spectrum, bank loan funds experienced the largest net outflows of $5.0 billion in August. Bank loans were one of the worst performers in August, rising a modest 0.4%, trailing core bonds, as measured by the Bloomberg U.S. Aggregate Bond Index (Agg), which gained 1.5%. While bank loans underperformed broader fixed income markets over the month, performance remains strong YTD, with the category up 4.4%, outpacing the Agg by roughly 1.3%. Following bank loans were large growth and large-value equities. Considering large blend was the top category by inflows in August, it's hard to believe the two components that make up large blend (both growth and value stocks) experienced outflows. Performance between the two investment styles was not too dissimilar either, with value stocks, as measured by the Russell 1000 Value Index, up 2.7%, while growth stocks, as measured by the Russell 1000 Growth Index, gaining 2.0%. Outflows in these two categories do continue a YTD trend, though, with large value and large growth ranking third and fourth, respectively, in terms of outflows ($20.7 billion and $17.4 billion, respectively). Instead of choosing an investment style, it appears investors are more comfortable owning a blend of both growth and value equities.  

Fixed Income Made Up Eight Out of the Top 10 Categories by Inflows in August

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

Source: LPL Research, Morningstar Direct 9/16/24

Sector Flows 

When looking at individual equity sector data in August, the real estate sector saw the largest inflow, gaining $1.4 billion. Real estate gained 5.7% in August, making it the second-best performer over the month and the top performer over the trailing 3-month period (up 15.5%). This continues a trend seen last month, as investors piled into financials following their impressive 6.4% rally in July. While real estate has had an impressive run over the past few months as interest rates have fallen, flows into the asset class remain net negative YTD. Following real estate is technology, gaining $1.37 billion as investors continued to pile into megatrends such as artificial intelligence (AI) and cloud computing. Technology has outpaced all other sectors YTD by a significant margin, experiencing $20.6 billion in inflows, roughly $16 billion more than the next closest sector in financials. Financials, utilities, and consumer defensives round out those sectors that finished August with net inflows, with financials being the only other sector besides technology that has experienced meaningful net inflows YTD ($4.3 billion).  

Conversely, energy experienced the largest outflow in August at $2.6 billion. Energy was the worst-performing sector in August, falling 2.1% as oil prices fell, highlighting again that investors may be rotating into and out of sectors based on performance. Energy remains a laggard YTD as well, experiencing $6.7 billion in outflows, with only healthcare losing more assets at $12.3 billion. Following energy was the healthcare sector, which continues a trend seen in prior months. Despite strong second quarter (Q2) earnings and performance in August, the healthcare sector saw outflows of $2.1 billion.  

Other sectors that experienced outflows last month include communications, consumer cyclicals, and industrials. While industrials lost assets this month, they remain net positive YTD, unlike communications and consumer cyclicals, which have experienced outflows. 

Real Estate Narrowly Edges Technology by Inflows in August

Trailing YTD Net Asset Flows across Morningstar Sectors (AUM, $ Billions)

Source: LPL Research, Morningstar Direct 9/16/24

When comparing the latest LPL Research Strategic and Tactical Asset Allocation Committee (STAAC) views with the August flows data, there are a number of similarities. The top asset class by inflows in August 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 long government, intermediate core-plus, and intermediate core bonds. In fixed income, the STAAC maintains a neutral duration stance, favoring core fixed income broadly over cash, as the risk-return trade-off is attractive relative to history. When looking specifically at government bonds, a component of the intermediate core and core-plus categories, the STAAC maintains a neutral stance.  

From a sector perspective, the STAAC is underweight the top sector by inflows, real estate, despite strong performance in August driven by a drop in interest rates, reasonable valuations, and an improving technical set-up. The STAAC recently downgraded the top sector by outflows, energy, to neutral from overweight, as seasonal weakness and deteriorating technicals led to the change in view. While the STAAC is no longer overweight energy, the STAAC still maintains a neutral view as there have been more shareholder-friendly capital allocations within the sector, along with attractive valuations. Lastly, the STAAC upgraded the healthcare sector last month to neutral on improving relative performance and accelerating earnings growth. From a contrarian perspective, we would interpret recent outflows from the sector as positive on a go-forward basis.