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Dec 26, 2018

Markets: Fund Flows Slide as Markets Gyrate

The Wall Street Journal.
Markets Bull logo.
Markets
Welcome back. I'm Jessica Menton, your markets guide this morning during the shortened holiday week. 
Futures are mildly higher as the S&P 500 teeters on the edge of a bear market. This month's rout puts major indexes on course for their worst December on record and threatens to halt the longest-ever bull market.
Yesterday, Japan's Nikkei Stock Average fell more than 1,000 points, or 5%, into a bear market.
Meantime, our Dawn Lim explains why investors are pulling back from the asset-management industry this year.

Markets in a Minute

Markets Data

Overnight Developments

  • Global stocks were mostly lower following a 3% fall in U.S. stocks on Monday, the worst Christmas Eve trading day in history.
     
  • Read our full market wrap here
     
  • Japan’s Nikkei 225 closed nearly 1% higher Wednesday, rebounding slightly from Tuesday's slump.

Anxious Investors Retreat From Funds

By Dawn Lim, asset management reporter 
The investor pullback from the asset-management industry in 2018 is the most severe since the last financial crisis.

Net inflows for U.S. mutual and exchange-traded funds in the first 11 months of the year fell to $237 billion, according to new estimates compiled by research firm Morningstar. That was down 62% from the year-ago period, the steepest decline since 2008. Asset managers attracted a record $629.5 billion in net flows during the same period in 2017, a boom year for the industry.
The slowdown in demand poses new challenges to asset managers, especially the smallest who lack the heft to compete with entrenched players. Many are already wrestling with a pricing war and market swings tied to trade-policy tensions, interest-rate increases and more muted economic growth.
Net flows, the difference between new investor dollars and redemptions over a period, are one measure of the asset-management industry’s health.
The biggest shift through 11 months of 2018 is the slowdown of new money into low-cost index funds. The rise of these investment products in the years after the last crisis attracted trillions in new money at the expense of old-fashioned stock and bond pickers, turning firms like Vanguard Group and BlackRock into Wall Street giants.
For six straight years, new money to funds that mimic broad markets climbed higher than the year before. That trend is reversing in 2018. Through the first 11 months net inflows to so-called passively managed funds were $393.3 billion, down 37% from the same year-ago period.
Active managers have long argued that volatility would help them gain ground on their indexing rivals. But investors continue to take their money out of their funds. Net outflows were $156.2 billion through the first 11 months of 2018, the third year of withdrawals for that period out of the last four.
Many investors became more measured in 2018 as more fear gripped the stock market. Inflows into equity funds fell by 55% in the first 11 months of the year, compared with the year-ago period. Inflows into taxable bond funds—which include high-yield debt and bank loans—also fell roughly by the same proportion. That could be a sign of worries about corporate profits and companies unable to pay off debt.
Are you worried about cooling flows into passive funds? Let the author know your thoughts at dawn.lim@wsj.com. Emailed comments may be edited before publication in future newsletters, and please make sure to include your name and location.

Market Facts

  • The S&P 500 utilities sector lost 4.3% on Monday, its largest percentage decline since August 2011.
     
  • Bond funds posted a collective net outflow of $10.1 billion in the week ended Dec. 19, according to fund tracker EPFR.
     
  • On this day in 1991, the S&P 500 closed above 400 for the first time, finishing the day at 404.84. It took the index just over six years to double. The broad index closed Monday at 2351.10.

Key Events

The S&P/Case-Shiller home-price index for October is out at 9 a.m.

Must Reads

Treasury Secretary Steven Mnuchin, right, speaks while Federal Reserve Chairman Jerome Powell listens during a December meeting. PHOTO: AL DRAGO/BLOOMBERG NEWS
Why is your retirement account in tatters? The majority of trades come from machines, models, or passive investing formulas that move in unison and blazingly fast.
As the market rout continues, President Trump stands firm. Amid a diving stock market and a partial government shutdown with no end in sight, the president is digging in, criticizing the Federal Reserve's interest-rate increases and saying the shutdown wouldn’t end until Congress funds a wall along the border with Mexico.
Holiday retail sales are the strongest in years. The figures suggest a stock-market swoon and partial government shutdown haven’t curbed consumer confidence and spending.
Investors are nursing billions of dollars in cryptocurrency losses. Regulators have only managed to claw back about $36 million over the past two years for duped investors during the crypto craze.
Investors find few havens. Defensive sectors known for steady dividend payments are avoiding the steepest declines—for now.
Foreign auto makers in China are facing a dilemma. A downturn in the country's car market has wrong-footed Ford, Peugeot, Hyundai and others, thanks to recent mistimed expansions, opening new plants just as the seemingly unstoppable growth of China’s auto market went into reverse.

What We've Heard on the Street

“The market is staggering toward the end of the year with big swings and deepening losses. While the rest of the year could be miserable, brave investors can benefit from the selloff.”
—Heard on the Street columnist Aaron Back

Stocks to Watch

Citigroup: The bank's stock has closed lower for 14 consecutive trading days, losing 24% in that time span. Shares fell 2% Monday to finish at $49.26, a new 52-week low. 
American Eagle Outfitters: Shares of the apparel and accessories retailer have sunk 16% so far in December, on pace for their worst month since May 2017. 
J.C. Penney: Shares of the retailer slid 6% on Monday to $1.02, a fresh all-time low. 

Source: WSJ

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