January 2024 Fund Flows Recap

Additional content provided by Kent Cullinane, Analyst, Research.

With January 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 analyze flows to gain insight into investor demand and sentiment surrounding asset classes, sectors, and other classifications of markets.

Morningstar Category Flows

When looking at Morningstar category data (excluding money markets) for January, intermediate core, and intermediate core-plus bonds experienced inflows of $12 billion and $8.6 billion, respectively. This continues from 2023, as investors poured $123.6 billion and $50.9 billion into these asset classes. Digital assets were another category that saw significant inflows in January, gaining $6.5 billion in assets, almost as much as large blend equities. The meaningful inflow into this asset class is due to the Securities and Exchange Commission’s (SEC) approval of the launch of new cryptocurrency-based products. Technology funds saw a meaningful inflow of $4.7 billion, as many of the so-called “Magnificent 7” (GOOGL, AAPL, AMZN, META, MSFT, NVDA, and TSLA) stocks continued to propel this asset class higher.

Looking at the other end of the spectrum, large-value funds saw the largest outflow at $10.8 billion. Again, this continued a theme from 2023, as flows have followed performance and value stocks have lagged their growth stock peers year-to-date. Following large value, a slew of small and mid-cap (SMID) categories (mid-cap growth, mid-cap value, and small blend) all saw outflows during the month. While SMID-cap stocks rallied towards the latter half of 2023, the asset class has underperformed the broader market by a wide margin this year, with the Russell 2000 Index down 2.3%, compared to the S&P’s 4.8% gain. Shorter-duration bonds also weakened over the period, as ultrashort bonds and municipal national short-term both experienced outflows. Given the potential for interest rate cuts in the second quarter, investors seem to be favoring longer-duration asset classes. Large growth, the top category by flows in 2023, narrowly missed out on the top ten but notably realized a net outflow of $1.4 billion over the month as some investors potentially took profits.

Investors Continue to Favor Longer-Duration Assets over Shorter

Trailing 1-Month Net Asset Flows Top Ten and Bottom Ten Across Morningstar Categories (AUM, Billions $)

Source: LPL Research, Morningstar Direct, 02/08/24
Disclosures: Indexes are unmanaged and cannot be invested in directly.
Past performance is no guarantee of future results.

There are similarities when comparing the latest LPL Research Strategic and Tactical Asset Allocation Committee (STAAC) views with the January flows data. The top asset classes by inflows are intermediate core and intermediate core-plus bonds. While the STAAC maintains neutral duration, the Committee favors fixed income broadly over cash, as the risk-return trade-off is attractive relative to history. The STAAC continues to favor large-caps over SMID-caps, which is broadly in-line with the flows data, as large-caps typically perform better during economic slowdowns given their generally stronger balance sheets when compared to SMID-caps. From an equity style perspective, the STAAC also favors growth over value, though this is mostly driven by large cap equities as our view has warmed recently on small cap value equities. Flows often signal powerful trends in markets that it pays to be on the right side of, but when they become extreme, this can also be a signal that a trade is getting crowded with few buyers remaining. We don’t believe that to be the case yet with any of our views but are continually monitoring.