(PUB) Investing 2016

March 2016 Vol. 24 No. 7

FundInvestor Research and recommendatio s for the s riou fund investo

SM

Outflows Threaten These Funds

The simple answer to this riddle is competition from exchange-traded funds. ETF s have gained the upper hand in the active/passive debate, even over open-end index funds, which generally offer com- parable cost benefits. More advisors are switching to ETF -focused strategies, and, when they get a new client, they quickly sell the weakest-performing active funds—possibly all the actively managed funds— in the client’s current portfolio. Self-guided investors are moving to ETF s, too. Although you can find an ETF for just about any cate- gory or asset class, the outflow trend has largely been centered on domestic-equity funds. Actively managed bond funds still pull in nearly all the new flows in that asset class, and active foreign-equity funds still have positive inflows. The argument for passive investing applies similarly to all asset classes, so it would seem that marketing and emotion at least play some role in the current tilt. That said, there are some quirks to bond indexes such as a heavy government weighting in the Barclays Aggregate and challenges in tracking high yield and muni indexes that do limit appeal on the fixed-income side. Yet the trend has more positives than negatives. Inves- tors are moving to lower-cost investments, and that ought to benefit their long-term returns. Competition is heating up for investors’ dollars, and, to the extent that they are throwing off subpar actively managed funds for solid low-cost ETF s, that’s a good thing. On the other hand, much of the cost savings is going to advisors who preach the benefits of low-cost ETF s but then charge additional fees that bring the investor back to higher total fees.

RusselKinnel, Director of ManagerResearch and Editor

Fund Reports

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PIMCO Total Return PTTRX has seen a remarkable $43 billion in outflows through the 12 months ended January 2016 . Yet in percentage terms, PIMCO Total Return’s 33% outflow places it just 47 th on the list of 12 -month outflows within the Morningstar 500 . Something big is happening. A striking 17 Morningstar 500 funds suffered outflows of at least 50% of assets under management in a year, and 80 shed 25% or more. Even a single month can bring big redemptions, as eight Morningstar 500 funds suffered an outflow of at least 10% in January alone. Also, in January we saw something we rarely see: a firm that subadvises a fund we covered was liqui- dating. It isn’t just that Aston/TAMRO Small Cap ATASX was merging into another fund but that TAMRO was closing up shop. Two years ago, the firm was running $1 . 3 billion. One year ago, it was running $800 million, but at year-end 2015 , it was down to $150 million. If we had just endured a brutal bear market, then the wave of redemptions would be par for the course. But this comes after a tremendous equity rally and therefore is unprecedented. True, we began 2016 with a sharp sell-off, but the outflow trend was well- established before that, and the 2016 downturn had little time to have an impact on flows through January.

Fidelity High Income Harding Loevner Emerging Markets Matthews Asia Dividend Vanguard Total World Stock Index

Morningstar Research Making Sense of Multialternative Funds

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The Contrarian

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Fund Companies Under Fire

Red Flags

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Beware of Rising Volatility

Market Overview

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Leaders & Laggards

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Manager Changes and News

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Portfolio Matters

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Lessons From Your Tax Return

Tracking Morningstar

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Analyst Ratings

Income Strategist

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The Case for Core Bond Funds

Changes to the 500

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FundInvestor 500 Spotlight

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Follow Russ on Twitter @RussKinnel

This presents fund investors with a new challenge in monitoring and selecting investments. You’ve got

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