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Investor Appetite for Fixed Income Surged Last Year — Even as Stocks Soared

“This wave of demand occurred despite low interest rates globally — and even negative interest rates in some European markets,” Morningstar said.

Investors flooded global mutual funds and exchange traded funds last year, doubling asset flows to $1 trillion while showing a strong preference for fixed income over equities, according to Morningstar. 

“On a net basis, nearly all this $1 trillion in long-term flows went into fixed-income funds, which received record inflows and easily surpassed the prior record of $869 billion set in 2017,” Morningstar said in a report Tuesday. “This wave of demand occurred despite low interest rates globally — and even negative interest rates in some European markets.”

Mutual funds and ETFs that buy U.S. bonds attracted a record $454 billion last year, as the country’s higher rates helped attract investors globally. Their appetite for equities, meanwhile, waned even as stocks soared in 2019.

“With the MSCI World Index gaining 27.4 percent in local-currency terms in 2019, the lack of investor demand again points to the influence of managed portfolios, which likely trimmed equity exposure throughout the year as prices rose,” Morningstar said. “That was most dramatically the case in the U.S., where investors collectively pulled $82 billion from equity funds.” 

Investors have been watchful for signs of a downturn in the longest ever bull market. Federal Reserve chairman Jerome Powell warned lawmakers Tuesday that “this low interest rate environment may limit the ability of central banks to reduce policy interest rates enough to support the economy during a downturn.” 

The U.S. central bank lowered its benchmark rate three times last year, with it now set to a range of 1.5 percent to 1.75 percent. “Over the second half of last year, economic activity increased at a moderate pace and the labor market strengthened further, as the economy appeared resilient to the global headwinds that had intensified last summer,” Powell told lawmakers in his prepared remarks Tuesday.

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Fixed-income inflows were strong across the U.S., Europe, and Asia last year, according to the Morningstar report. The most popular U.S. fixed-income fund among Europeans was BlackRock’s iShares $ Treasury Bond 0-1yr ETF, which had almost $5 billion of inflows.

Equities funds, meanwhile, collected $9 billion globally last year, “basically flat” growth following $354 billion of inflows in 2018, according to the report. Europe led all regions with about $44 billion of equity inflows, followed by Asia, which attracted $37 billion.

The Morningstar report also tracked assets in money market funds, including them in its ranking of asset managers.

BlackRock and its iShares funds collected a total $298 billion in 2019, “unseating Vanguard as the top global flows recipient” across long-term and money markets funds, according to the report. Vanguard Group — which had topped Morningstar’s inflows list since 2013 — came in second at $263 billion last year. 

Fidelity ranked third, with investors adding $193 billion to its funds. More than 60 percent of the inflows came in the second half of 2019, after the firm launched two zero-fee index funds, Morningstar said.

Looking solely at assets flowing into long-term funds, the $221 billion that Vanguard attracted last year surpassed the $205 billion collected by BlackRock and iShares. “Like BlackRock/iShares, flows into Vanguard’s fixed-income funds powered much of its asset growth,” Morningstar said.

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