Troublesome Redemption Data in Equity Funds, Where That Money Goes…

Troubling data keeps coming out of the old world mutual fund universe.  Battered by two bear markets in a decade, mutual fund investors have continued to flee positions in actively managed funds that invest in domestic equities.

The culprit is not just the secular bear market.  Morningstar and ICI indicate that investors have been adding money to bond funds, international stock funds, index funds and exchange-traded funds.  BusinessWeek highlighted more of these figures.  Exchange-traded products are obviously a huge part of the issue.  We recently featured how ETF assets under management are again expected to double by 2015.  Net redemptions are on pace to reach an unprecedented five years consecutive years.  Over the past 10 years actively managed domestic equity funds have seen $51 billion in redemptions.

There is another exception which we have covered, part-bond and part-stock… Target Date Funds have attracted billions in new assets.  This sector has rapidly grown and is taking more and more of the retirement market share in 401/K and other retirement plans.  The low fees and the ease of understanding combine with some international exposure that investors have often avoided before the last decade.

This recent trend of redemptions has reversed 10 years of net inflows into domestic equity funds in the 1990’s.  Thanks to a generally rising market and the widely heralded success of stock pickers such as Peter Lynch, Ken Heebner, Bill Miller, and others, investors poured $1.3 trillion into domestic equity funds.  In the past, it was a common pattern among investors to resume contributions to equity mutual funds the next year after net redemptions, as in 1988 and 2002.

We may have lost a generation of equity investors in the last recession.  That contribution resumption trend seems a thing of the past as investors fled funds in 2008 but continued to pull money out of funds even as they rebounded in 2009 and 2010.  In all, redemptions from domestic equity funds totaled $335 billion between from 2007 to 2010 per that Business Week data.

The bottom line . . . investors are showing a distinct disillusionment with actively managed equity funds, withdrawing $8 billion so far this year and $51 billion over the last ten years.  There are many more alternatives for investors to choose from today, often at far lower fees.