U.S. Equity Funds Post Slower Inflows
Investors are bracing for several interest rate hikes amid a Russia-Ukraine war.
In February, U.S. equity fund flows hit $48 billion, a 70% decline from the year before. In the previous month, U.S. equity fund flows hit their lowest level since the pandemic began.
With data from Morningstar, we show how the invasion of Ukraine and a rising rate environment has affected U.S. equity fund flows.
In January, investors shed a record $23 billion from large growth funds, the highest level since 2017. This trend continued in February as investors sought out lower-risk investments.
Growth stocks historically tend to outperform when interest rates are declining. When the price of capital is low, companies borrow and expand operations at a lower cost.
The reverse is true when rates rise, putting pressure on corporate earnings and equity valuations. In March 2022, the Fed raised interest rates for the first time since 2018.
Growth funds also tend to be more volatile during market selloffs. So far in 2022, the Cboe Volatility Index (VIX) is up more than 40%.
|Fund Category||January 2022 Estimated Net Flow||February Estimated Net Flow|
Large blend funds saw the highest inflows, at $38.5 billion, while large cap value funds saw a moderate $15.8 billion in inflows.
Unlike growth funds, value funds tend to outperform when interest rates are rising. Over the last decade, growth funds, marked by low-margins and high valuations have shown stronger performance than value.
U.S. Equity Funds by Sector
Which U.S. equity fund sectors saw the highest inflows and outflows?
|Sector Category||Estimated Net Flow – Feb 2022||Estimated Net Flow – YTD 2022|
Energy, consumer defensive, and natural resources—all typically cyclical, value-skewed sectors—saw the highest inflows at $1.7 billion, $1.0 billion, and $0.8 billion, respectively. Gas prices in the U.S. have hit record prices amid supply pressures from the war.
Meanwhile, investors withdrew $1.9 billion from technology sector funds in February, the highest out of any sector category. Year-to-date, technology sector funds have seen almost $7 billion in net outflows.
As investors veer away from growth sectors, they are flocking to safer assets, like money market funds as the humanitarian crisis in Ukraine unfolds.