Dimensional Fund Advisors

Interesting Times in the Mutual Fund World

Dimensional Fund Advisors

Morningstar, Inc. just released its reported estimated U.S. mutual fund asset flows for September 2013. The results are summarized in this press release. Below, we will explain why we found it more interesting than prior reports.

First, among all the mutual fund families, Dimensional Fund Advisors (DFA) had the third highest inflows for the month of September, the third quarter and the one-year period ending 9/30/2013. The only company that was consistently higher than DFA in inflows was Vanguard, which is exactly nine times larger than DFA in terms of assets under management. When inflows are scaled to assets under management, DFA had nearly triple the inflows of Vanguard for the one-year period ending 9/30/2013 (see two charts below)

American Funds, whose troubles we have written about here and here, continued to bleed money with $2.2 billion of outflows for the month of September, $5.7 billion for the third quarter and $30.9 billion for the year (see chart below).

Of the ten largest mutual fund families, American Funds is the only one that suffered outflows for the year. At the rate they are going, they may soon lose their membership in the trillion-dollar club, leaving only Vanguard and Fidelity. The fund family that experienced the most severe outflows in the third quarter was PIMCO, which lost $24.9 billion, most of which came from the PIMCO Total Return Fund. Interestingly enough, the $20.8 billion of outflows from this fund account for all of the outflows experienced by the asset class of taxable bonds.

In looking at the flows of asset classes, the only one that saw consistent outflows for the month, quarter and year is municipal bonds. Paradoxically, one may think that muni bonds should have become more attractive with the increase in 2013 tax rates, but it is this very increase that caused munis to trade at higher prices (and hence lower yields), making them less attractive. Aside from that, some investors may have been spooked by Detroit and other municipal bankruptcies that have occurred around the country. The asset class with the highest inflows for the month, quarter and year was money market, even though its yield is essentially zero. This suggests that many investors are still feeling a great deal of uncertainty and are uncomfortable putting their capital at risk. Unfortunately for them, however, there is a price to be paid for being sheltered from risk—inflation.

Among equities, the asset class with the highest inflows was international equity. As we reported in our 3Q/2013 review, international developed equities had a very strong third quarter, although they still lag U.S. equities on a year-to-date basis. One trend that we find somewhat disturbing is the accelerating popularity of “alternative” mutual funds. These are essentially pale imitations of hedge funds, a category most unworthy of imitation. The one fund that accounts for much of the inflows into alternative funds is the Mainstay Marketfield fund, which is a long/short global equity fund with a 5.50% front-end load (A Shares) and a 1.80% expense ratio. As we have pointed out many times, long/short funds essentially have the same expected return as Treasury Bills (before costs), but with a much higher risk. With its high level of costs, shareholders in this fund may be facing future disappointment.

As fiduciaries for wealth, Index Fund Advisors will continue to keep an eye on broad trends in the investment arena in general and mutual funds/exchange-traded funds in particular. Please do not hesitate to drop us a line at [email protected] if you have any questions or concerns.