May Fund Flows

With additional content provided by Kent Cullinane, Analyst.

With May behind us, we conducted a deeper dive into fund flow activity last 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 May, large blend equities experienced the largest inflow by a wide margin. The group captured inflows of $29.3 billion, continuing a trend we’ve seen all year, as large blend equities have gathered the most assets out of any category at $67.5 billion. Following large blend equities were a slew of bond categories, including intermediate core, ultrashort, high yield, and global bond-USD hedged, each with inflows between $4-$8 billion over the month of May. Year-to-date (YTD), intermediate core and intermediate core-plus bonds have seen inflows of $66.8 billion and $30.3 billion, respectively, making their combined total of nearly $100 billion larger than large blend equities by roughly $30 billion. Given the risk-reward trade-off in fixed income relative to equities, it’s easy to understand why investors continue to pile into bonds, with seven of the top 10 categories by inflows in May comprised of bonds.

Looking at the other end of the spectrum, mid-cap growth funds saw the largest outflow in May at $3.3 billion. Following mid-cap growth were trading-leveraged equity, moderate allocation, and healthcare funds, with net outflows of $2.8 billion, $2.7 billion, and $2.3 billion, respectively. Healthcare has been a notable laggard year-to-date as well, as investor sentiment has turned on the sector following lackluster earnings, slowing COVID-19 related sales and patent expirations, as well as disappointing Medicare reimbursement rates.

Large Blend Equities Continue to Reign Supreme

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

Source: LPL Research, Morningstar Direct, 6/24/24

Sector Flows

When looking at individual equity sector data in May, the utilities sector saw the largest inflow, gaining $824 million, followed closely by industrials ($777 million) and technology ($604 million). Utilities’ strong performance in May (up 8.5%) led to meaningful inflows, reversing a trend of outflows in April. Utilities’ performance trailed only technology (up 10.1%) in May, which continued its dominance as the top sector year-to-date in terms of both performance (up 19.1%) and inflows ($12.8 billion).

Conversely, healthcare experienced the largest outflow in May at $2.3 billion. Following healthcare was energy, real estate, and consumer cyclicals. Only the industrials and technology sectors have realized net inflows in the year-to-date period, with healthcare gathering the least assets by a wide margin compared to sector peers.

Utilities Reverse Course, Experiencing Positive Flows in May

Trailing 1-Month Net Asset Flows across Morningstar Sectors (AUM, $ Billions)

Source: LPL Research, Morningstar Direct, 6/24/24

When comparing the latest LPL Research Strategic and Tactical Asset Allocation Committee (STAAC) views with the May flows data, there are a number of similarities. The top asset classes by inflows are large blend equities, intermediate core, and intermediate core-plus bonds. 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.

In fixed income, the STAAC maintains a neutral duration view, favoring fixed income broadly over cash, as the risk-return trade-off is attractive relative to history.

From a sector perspective, the STAAC is neutral the top sector by inflows, utilities, as enthusiasm for power demand driven by the surge in artificial intelligence (AI) presents a potential growth opportunity for this defensive sector. The STAAC is also neutral technology, the top sector YTD, as valuations appear stretched relative to other sectors, although the technical trend remains positive. Health care, the largest sector by outflows, was recently downgraded to underweight reflecting the slowdown in COVID-19 related sales, weak technicals, and potential presidential election risk.