With October behind us, we conducted a deeper dive into fund flows over the month. Flows measure the net movement of cash into and out of investment vehicles, such as mutual funds and exchange-traded funds (ETF). We analyzed flows to gain insight into investor demand and sentiment surrounding asset classes, sectors, and other classifications of markets.

 

Morningstar Category Flows

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When looking at Morningstar category data in October, large blend equities experienced the largest inflow at $21.1 billion. This continues a trend we’ve seen throughout the year, as the large blend category is the top category in terms of flows over the trailing year-to-date (YTD) period, gaining nearly $150 billion in inflows. Following large blend equities were intermediate core bonds, gathering $16.8 billion in flows. Like large blend equities, intermediate core bonds, and its more aggressive compliment category, intermediate core-plus bonds, have been a favorite category for investors this year, ranking second and third, respectively, over the YTD period, gathering a combined $164.4 billion. Another notable category was China’s equities, gaining $9.6 billion in flows in October. Chinese equities were one of the top-performing categories throughout mid-to-late September and into early October, gaining over 30% between September 10^th and October 7^th. Investors poured into Chinese equities following the announcement of a stimulus package, hoping to spur its lackluster economic growth in recent years.

 

Looking at the other end of the spectrum, large growth funds experienced the largest net outflows of $8.6 billion in October. Large growth stocks, as measured by the Russell 1000 Growth Index, have gained nearly 24% this year. The significant outflows in October could be a sign of investors taking profits in one of the top-performing categories YTD. Following large growth, were a combination of foreign equities (foreign large growth and diversified emerging markets) and large-cap value equities. Foreign equities, both developed and emerging, have trailed domestic equities all year, with October being another month of relative underperformance. Large value stocks continue to see outflows, ranking as the third largest category by outflows in October and fourth over the YTD period.

 

China Sees a Boost in Flows Following Stimulus Announcement

Trailing One-Month Net Asset Flows: Top Ten and Bottom Ten Across Morningstar Categories (AUM, Billions $)

•                     Source: LPL Research, Morningstar Direct, 11/19/24
                                Disclosures: Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.

 

Sector Flows

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When looking at individual equity sector data in October, the industrials and real estate sectors reported the largest inflows at roughly $1.5 billion each. Both sectors have seen meaningful inflows this year, with real estate and industrials ranking second and third, respectively. While real estate and industrials have gathered significant assets YTD, they still trail technology by a significant margin. Technology remains as the top sector YTD, with $18.1 billion in inflows, nearly six times the next closest sector (real estate) at $3.7 billion. Real estate also continues a trend from the prior month where the sector outperformed its sector peers by inflows following impressive performance in the third quarter (Q3), gaining roughly 17%.

 

Conversely, health care experienced the largest outflow in October at $2.4 billion. Health care has struggled in 2024, having been one of the top three sectors in terms of outflows in eight out of the last 10 months. Given the trend we’ve seen of investors chasing performance (with capital pouring into the top sector YTD, technology), it’s no surprise investors are dumping health care, following a lackluster October (dropping 4.6%) and an underwhelming YTD performance (up 8.9%). Following health care was the energy sector, losing $1.4 billion in assets in October. Like health care, energy has been an underperformer this year relative to sector peers, ranking last in YTD performance with a gain of only 8.3%, as of October 31. Oil prices, which are highly correlated with energy sector performance, have largely slid this year as global demand, particularly in China, has slowed meaningfully.

 

Industrials and Real Estate Top Monthly Sector Inflows

Trailing one-month Net Asset Flows across Morningstar Sectors (AUM, $ Billions)

•                     Source: LPL Research, Morningstar Direct, 11/19/24
                                Disclosures: Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.

 

When comparing the latest LPL Research Strategic and Tactical Asset Allocation Committee (STAAC) views with the October flows data, there are a number of similarities. The top asset class by inflows in October was large blend equities. The STAAC has a slight overweight to large-cap equities over small, with the tilt coming more from large growth equities than large value. While large caps are more expensive than small caps from a valuation perspective, earnings power and quality, coupled with impressive technicals, outweigh their relatively steep valuations. Following large blend equities, were intermediate core bonds. In fixed income, the STAAC maintains a neutral duration view, favoring core fixed income broadly over cash, as the risk-return trade-off is attractive relative to history. From a sector perspective, the STAAC is overweight the top sector by inflows, industrials, as defense spending, onshoring, and artificial intelligence (AI) data center build all remain key tailwinds for the sector. The STAAC remains neutral on the top sector by outflows, health care, although the relative trend has been negative given election-related policy risk and a double-digit decline in Eli Lilly shares (LLY).

 

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