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Investors turn to fixed income and money market in 2016, says Morningstar


Worldwide mutual fund and ETF asset flows decreased to USD728 billion in 2016 from USD1 trillion in 2015, signalling slowing demand for global markets.

That’s according to Morningstar’s fifth annual Global Asset Flows Report which also reveals that outside of the US, flows were mostly evenly distributed among the three other major regions analysed by Morningstar: cross-border funds, which are available in multiple markets, Europe, and Asia, with flows of USD138 billion, USD103 billion, and USD134 billion, respectively.
The US fund industry had new asset flows of USD288 billion, an increase from USD260 billion in 2015.
“2016 was a year of modest growth around the world, with heightened uncertainty due in part to extraordinary political events,” says Alina Lamy (pictured), senior markets analyst for Morningstar. “Investors are reacting to this turbulent environment by going back to the basics, looking for less risky assets, positioning their portfolios in expectation of rising interest rates, or selling off equities after a significant run-up. More specifically, fixed-income strategies saw the largest flows globally in 2016 and commodity funds experienced a high organic growth rate, with the largest inflows going to the precious metals category.”
The pattern of flows by category group notably differed from 2015. In 2016, the category groups that received the largest flows were fixed income and money market with flows of USD412 billion and USD196 billion, respectively. In 2015, the top-receiving category group was equity, with USD346 billion, followed by allocation, with USD167 billion. In terms of organic growth rates, commodities grew the fastest at 25.7 percent in 2016.
Vanguard continued to dominate the asset management industry last year, sustained and propelled by the growing popularity of index strategies. Vanguard, with net inflows of USD317 billion, is followed by BlackRock/iShares with net inflows of USD154 billion. The fastest-growing firm in the top 10 was State Street, which saw an organic growth rate of 12.5 percent in 2016. Generally, firms that expanded their product lines to include ETPs and lower-cost options have benefited, while those focused on traditional active management have suffered such as Franklin Templeton, which saw an outflow of USD72 billion in 2016.
In the US, index funds attracted USD492 billion in 2016. Their active counterparts, in sharp contrast, saw USD204 billion of outflows. In the Asia, cross-border, and Europe regions, however, active flows beat their passive counterparts.
The largest discrepancy between active and passive flows occurred in the equity category group, with USD390 billion going into index funds and USD423 billion flowing out of active funds. Fixed income received inflows across both active and passive strategies worldwide.
Funds that have a quantitative Morningstar Rating of 4 and 5 stars saw inflows in 2016 of USD127 billion and USD221 billion, respectively, while 1-, 2-, and 3-star funds suffered outflows. Similarly, funds that have a qualitative Morningstar Analyst Rating of Gold and Silver attracted the largest inflows of USD29 billion and USD14 billion, respectively, and posted the only positive organic growth rates.
ETP assets continued to grow, reaching USD3.6 trillion globally at the end of 2016, signalling that investors are increasingly sensitive to fees.

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