Institutions continued shedding equity, fixed income in 2012

Assets continued to flow out of tax-exempt equity and fixed-income products in 2012, while higher-yield-seeking strategies saw the bulk of inflows, according to the annual Style, Trends, Analysis and Research report from Callan Associates Inc.

Both active and passive equity and fixed-income strategies saw outflows in 2012 for tax-exempt products, which comprise separate accounts and commingled funds. On the mutual fund side, active equity funds saw outflows, but there were significant asset flows into equity index funds and exchange-traded funds as well as active and passive fixed-income funds.

“It's not anything a long equity manager wants to see. It's certainly a challenge for long U.S. equity managers on the tax-exempt side,” said Judith McKinney, Chicago-based executive vice president, manager of Callan's institutional consulting group and co-author of the report.

Ms. McKinney said most of the outflows on the tax-exempt side are going into alternative strategies; Callan's report deals only with equity and fixed-income strategies.

Active U.S. equity strategies lost about 12% in assets, while index funds lost more than 5% on the tax-exempt side. Active and passive international equity lost 4% and 6%, respectively, excluding global equity and international small cap. All U.S. fixed-income categories outside of index funds and long-duration strategies lost assets in 2012.

Ms. McKinney said Callan has seen “extensive” flows into passive strategies in recent years, so expected a slowdown this year.

Emerging markets debt had inflows of $3.6 billion, or 10% growth, the largest percentage gain on the tax-exempt side, followed by global fixed income, small-cap international equity and global equity.

Active equity mutual fund strategies lost about $190 billion in assets; only emerging markets equity saw positive flows. However, passive equity funds and ETFs gained about $80 billion. Active U.S. fixed income gained $35 billion, while passive funds and ETFs gained another $42 billion.

While trends among tax-exempt flows continued from 2011, it was a different story for mutual funds. In 2011, actively managed U.S. and international equity funds had modest positive flows, with the exception of large-cap core, while broad market fixed income lost about 4% of AUM.

High-yield fixed income had a $21 billion, or 10.5%, gain in mutual funds, while emerging markets debt and equity gained $15 billion each for increases of 51.3% and 8.4%, respectively.

“It is funds that potentially have higher yields where we saw the greatest flows,” Ms. McKinney said in a telephone interview. “Everyone's searching for yield.”

Equity strategies held 65% of tax-exempt assets and 77% of mutual fund assets. Actively managed strategies held 72% of tax-exempt assets and 69% for mutual funds. The largest total AUM categories were large-cap index funds and active non-U.S. equity at 14% and 12%, respectively, for tax-exempt. Large-cap index funds and core bonds were the highest for mutual funds at 18% and 11%, respectively.

It was another difficult year for active managers in 2012. The year ended with less than half of the S&P 500 stocks outperforming the overall index. Actively managed domestic large-cap, midcap and small-cap equity products have had outflows for six straight years with last year seeing the largest amount since 2007 for large and midcaps.

Non-U.S. equity products have also seen negative flows in each of the past six years. In 2012, only 25 of 225 products saw inflows greater than $500 million and most are run by well-known firms with a significant AUM. The biggest common factor among those firms with inflows was a substantial exposure to emerging markets, according to the report.

Continuing the trend of losses, U.S. core fixed income has lost assets in each of the past six years while core-plus has seen outflows in five of the past six years, but actually lost a cumulative $35 billion more than core strategies. High-yield products also have lost assets in five of the last six years, but at a much smaller percentage. Long-duration bonds, which were introduced to the study only two years ago, saw a 3%, or $9 billion, increase last year due to more plans implementing liability-driven-investing strategies. Twenty-four of the 35 managers analyzed had positive flows into long-duration products.

Most of the assets appear to be flowing into absolute-return-oriented strategies like global tactical asset allocation and risk-parity strategies, according to the report, although it only briefly deals with alternative flows.

Tax-exempt equity and fixed-income strategies in the report held $3.9 trillion in assets, while mutual funds represented $5.8 trillion.