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Will Record Outflows Spell Doom for Mutual Funds?

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After registering record declines on Oct 10, all the three key U.S. indexes posted significant losses for the week ended Oct 12. Higher bond yields and renewed fears of a trade war may compel investors to dash away from equity funds. For the week ended Oct 17, equity funds posted their biggest weekly outflows since June, per Lipper.

A sudden increase in long-term bond yields weigh on the equity market as a rapid increase in bond yields increases borrowing costs. A sudden spike in the yield of benchmark 10-year and U.S. Treasury note buoyed by a series of strong economic data also resulted in a sell-off in bond funds. Per Investment Company Institute (ICI), bond funds posted their biggest outflows for the week ended Oct 10, since February.

Investors’ Fear Far From Over

In the third week of October, the Dow and the S&P 500 managed to gain, while the Nasdaq declined. However, in the preceding week, all three major stock indexes fell and posted the worst weekly performance since March.

Both the Dow 30 and the S&P 500 registered weekly increase after three consecutive weeks of loss, while the Nasdaq posted its third successive weekly decline. Notably, in the second week of October, the S&P 500 posted its longest weekly drop since the Brexit referendum in June 2016.

A sudden increase in long-term bond yields weigh on the equity market as a rapid increase in bond yields in turn boost borrowing costs. Additionally, the Fed has already raised its federal funds rate for the third time this year. A high interest rate environment along with continued trade war tensions between the United States and China weighed on investor sentiment.

Equity Funds Post Record Outflows

According to Lipper’s weekly fund flow report for the same period, equity fund flows remained gloomy last week. For the week ended Oct 17, total outflows in equity funds, including mutual funds and ETFs, reached $17.5 billion, registering the second straight week of declines. This is the most cash pulled away from equity funds by investors since this June. In equity mutual funds alone, total outflows were at $3.9 billion.

Moreover, domestic equity funds posted outflows of $2.4 billion, while non-U.S. equity funds registered outflows of $1.5 billion. In this context, top Zacks ranked domestic equity fund, Fidelity SAI US Large Cap Index (FLCPX - Free Report) is definitely in troubled waters.

Outflows in Bond Funds Biggest Since February

As per the latest ICI weekly fund flow report, bond funds, including mutual funds and ETFs, had total outflows of $7.14 billion for the week ended Oct 10, its highest since February. Taxable bond mutual funds and ETFs witnessed estimated respective outflows of $451 million and $5.03 billion for the week.

Moreover, municipal bond mutual funds and ETFs witnessed estimated outflows of $1.42 billion and $230 million, respectively, for the week. In this respect, top Zacks-ranked taxable bond fund BlackRock High Yield Bond Investor C (BHYCX - Free Report) and municipal bond fund like Wells Fargo Strategic Municipal Bond C (DHICX - Free Report) are bearing the brunt.

Summing Up

Despite a strong earnings season, the Fed’s decision to raise interest rates for the third time so far this year and a possible one more rate hike in December weighed on investor sentiment. A high rate environment resulted in a rapid increase in bond yields, which in turn boosted borrowing costs.

Following this development, investor concerns resulted in market sell-off, which eventually led to huge outflows in equity and bond funds. So, it can be concluded that recent sell-off will remain a headache for mutual funds in the days to come.

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