Equity Market Net Flows Top $400B in 2013

The research, released by New York-based Strategic Insight, also shows that the average U.S. stock fund gained 31% in 2013, nearly double the 15.9% earned by international stock funds. Bond funds, following four years of inflows in aggregate exceeding $1 trillion, reversed course beginning in the spring of 2013 as interest rates started to rise. Flows to bond funds were negative each month since June 2013, and redemptions reached nearly $50 billion in the fourth quarter of 2013.

“In 2014, we should witness the continuation of stock investors’ re-engagement,” says Avi Nachmany, director of research for Strategic Insight, which is an Asset International Inc. company. “Demand will remain across a wide spread of U.S. and international stock investment approaches, but will also include bond funds anchoring asset-allocation programs and especially those positioned for an improving global economy.”

The research also reveals that equity funds netted $253 billion in 2013 (excluding ETFs and variable annuity funds), led by strategies for globally diversified developed markets. While bond funds in aggregate suffered modest net redemptions for the year, flexible ‘alt’ bond funds and those positioned for a rising interest rate environment—such as floating rate, short maturity and global—continued to experience positive flows.

As for exchange-traded products (ETPs), U.S. equity ETPs netted $19 billion during December 2013 and $188 billion in total for 2013. “Notably, U.S. equity ETFs outsold international ETFs last year by a ratio of over two to one, whereas international funds were the top-sellers among mutual funds. Overall, however, trends in net sales of ETPs mirrored their mutual fund counterparts, with equity fund gains contrasting a pullback from bond funds,” says Alan Hess, a Strategic Insight analyst.

Rising stock markets since 2009, which caused leading stock indices to eclipse prior records in 2013, triggered dramatic increases in capital gain distributions. Such distributions are estimated to exceed $200 billion for the year, more than doubling 2012 distributions and reaching the highest level since 2007. Among stock funds paying capital gains in December 2013, the average ratio was 4.8% of NAV for U.S. equity funds and 2.7% for international equity funds.

For individuals owning actively managed stock funds in taxable accounts (not in individual retirement accounts, 401(k)s, or variable annuities), the tax impact of such high capital gains distribution may trigger a greater interest in the tax advantages of index funds and ETFs. “One area of intriguing promise is actively-managed ETFs, a segment of intense innovation activity for the coming years,” says Nachmany.

As for flows by channels of distribution, mutual fund flows during 2013 were highest via the independent and regional broker/dealer channel, which accounted for 33% of fund flows via intermediaries. Broker/dealers also contributed an estimated 18% of ETF flows last year. ETF distribution was led by registered investment advisers (RIAs), who controlled 23% of ETF flows in 2013 (more than double their 9% share of mutual fund flows). Research also reveals that ETF flows via banks accounted for 17% of total ETF flows. This is more than four times the banks’ small and falling share of mutual fund flows (4%).

“Fund managers are increasingly focusing their distribution efforts in more targeted ways across the intermediary-sold market. This includes evaluating opportunities based on differences in fund and ETF acceptance, asset velocity and pace of redemptions, adoptions of innovative funds, and more. As the industry continues to mature, such focus continues to increase in importance,” concludes Dennis Bowden, Strategic Insight’s assistant director of research.

Strategic Insight is a provider of unbiased mutual fund industry research and business intelligence. For more information, visit http://www.SIonline.com.