Mutual fund liquidations have risen within the first six months of 2013 compared to the same period last year. And if the current trend of redemptions continue from both equity and bond funds, then fund providers are in for another bumpy ride in the second half.
According to data from Morningstar, there were 248 fund liquidations year-to-date through June 27 compared to 240 for the same period in 2012. The number of taxable bond funds liquidated through June more than doubled to 24 from 11 last year. Municipal bond funds fared even worse with 21 liquidations this year versus three for last year.
Equity funds fared a bit better compared to bond funds in that there were 95 U.S. equity funds that closed this year versus 91 in 2012, and the same number of sector equity funds (10) closed in 2013 versus 2012. Also, the number of international equity funds that liquidated dropped from 69 in 2012 to 48 this year.
Whatever happened to the Great Rotation whereby jittery bond investors were supposed to flock to equity funds in droves? Well, it never really happened, according to Morningstar's Director of Mutual Fund Research Russell Kinnel. "Lately, people have been redeeming from everything and the main change has been people going from taxable bond funds being the most popular to the least popular," he said.
Gone too were 21 alternative mutual funds, which are heavily marketed to provide investors with alpha in any market condition, in the first half of both 2013 and 2012. For example, San Francisco-based Forward Funds is shelving its Forward Global Credit Long/Short Fund (FGCLX) on July 26. The fund was launched in September 2011 and managed just over $8 million as of June 10, according to Bloomberg.
Also, the Thesis Flexible Fund (TFLEX), which launched in March 2010, was touted as a fund equipped to tackle markets in any condition but failed to gain any traction among investors having managed just $2.5 million as of April 19. It closed on May 6.
The number of fund launches this year, including new share class launches, dropped to 832 compared to 897 in 2012. There were 152 taxable bond funds that came to market this year versus 191 in 2012. However, that number jumped to 78 muni-bond funds versus 31 for 2012.
"You'll probably also see more unconstrained bond fund and bank loan fund launches. Those are the few areas where people are looking for shelter from the interest rate surge," said Kinnel.
Interestingly, 12 new sector funds, including real estate, energy and gold funds launched in the first half versus three in 2012. For example, the Ivy Global Risk-Managed Real Estate Fund (IVIRX) debuted in April and managed just $2.9 million as of July 2. The fund is down 4.08% in its first three months of trading as of July 2, according to Bloomberg. Meanwhile, the Bloomberg REIT Index fell 4.2% on June 20, extending a 3% fall on the previous day, capping the worst two-day decline since October 2011, according to Bloomberg.
"Fund launches, particularly in the sector area, are often a contrarian indicator and that would certainly appear to be the case here," said Kinnel. "The last two months have been particularly brutal to real estate and gold. One thing we can be certain about is more sector fund liquidations."
So what, if any, fund launches have caught on with investors? Kinnel noted that the TIAA-CREF International Opportunities Fund (TIOIX), which bets on foreign equities, has gathered some $243 million in assets since launching on April 12, and that DoubleLine Floating Rate Fund (DLFRX), which bets on floating rate loans and opened to investors on July 1, is managing some $245 million in assets.
Mutual fund asset flow numbers for the first half through May (Morningstar's June flows will not be ready until after this article publishes) look a bit more promising until you get to June. For example, through May mutual funds gathered $262 billion versus $155 billion in 2012.
However, total estimated outflows from long-term mutual funds were $5.43 billion for the week ended Wednesday, June 19, according to the Investment Company Institute's latest tally. Equity funds had estimated inflows of $1.87 billion for the week, compared to estimated outflows of $1.03 billion in the previous week, and bond funds had estimated outflows of $7.97 billion, compared to estimated outflows of $13.47 billion during the previous week.
"There were huge spikes in redemptions in taxable bond fund and equity funds within the last two weeks," said Kinnel. "Two weeks doesn't necessarily add up to anything but it tells us that the market really did hit a nerve and if we remain in redemptions across the board, then we'll see more launches called off and more funds liquidated."
