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What Was the Correction's Toll on Funds?

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The asset management industry was clearly impacted by massive waves of selling last month, though it is slowly recovering.

In the final week of August, investors pulled roughly $27.3 billion from U.S. mutual funds, according to the Investment Company Institute. The withdrawals were the most the industry had seen since June 26, 2013, when they pulled nearly $28.7 billion, ICI's data show.

In the week ending on Aug. 26, equity funds outflows were nearly $11 billion, outflows from bond funds were almost $12.1 billion, and mixed funds saw $4.3 billion in outflows, according to ICI.

Market volatility during the end of August was enough that the NYSE invoked Rule 48. Adding to the mix were computer problems that prevented a custody bank from providing accurate prices for mutual funds and ETFs for nearly a week, prompting federal and state regulator probes into the glitch.

Despite the turmoil, ICI Chief Economist Brian Reid suggests that mutual fund "shareholders overwhelmingly remained invested."

"While outflows to domestic and world equity funds and taxable bonds picked up slightly, the flows were still just a tiny fraction of total assets in those respective categories," Reid says. "These data reinforce the long-term nature of fund investment and signifies that recent outflows - even in a turbulent week - represent a very small portion of investor activity in the marketplace."

There was some rebound in the aftermath of the correction. The following week ending on Sep. 2, domestic equity funds saw inflows of roughly $1.78 billion, while inflows to world equity funds were around $191 million, ICI data show.

However, as the negative headlines started rolling in last month, Millennium Trust Company CEO T. Scott McCartan says it should have been no surprise that all mutual funds saw massive withdrawals. "It's just so volatile that people are just saying, 'I don't want to play anymore,'" McCartan says. "I think that's all this is."


While this very well could be the case, McCartan also entertains the possibility of a looming interest rate hike from the Federal Reserve was another factor.

In the weeks leading up to the first potential interest rate hike in nearly a decade, McCartan says there should be no surprise that shareholders had a knee-jerk response, pulling from both equity and bond funds.

"The chances are growing that the rate hike is up soon. When you look at high interest rates, what do they do with the value of bonds? They go lower," he explains, adding that, "I don't think this is a rush for out of safety. I think if rates go higher they lose principal value."

He added that while it is a possibility that a potential interest rate increase could have direct consequences on mutual funds, it is more likely the withdrawals accelerated due to the overly unpredictable U.S. domestic market.

In the week proceeding Aug. 26, while not as volatile, were not much better. Long-term equity funds saw just $543 million in total outflows, according to ICI.

Domestic funds, in the period ending on Aug. 19, saw $5.2 billion in outflows while international funds were the saving grace with more than $4.6 billion in inflows, ICI data show. Domestic equity funds had $2.28 billion in outflows in the week ending on Aug. 12, and almost $7.25 billion in outflows for the week ending on Aug. 5, ICI says.

Municipal bond funds had inflows of $50 million, while taxable bonds had outflows of nearly $2.34 billion in the week ending on Aug. 19, ICI says.

Domestic equity funds saw outflows of more than $9.7 billion in the week ending on Aug. 26, while international funds saw almost $1.2 billion in outflows, according to ICI data. Taxable bond funds in this period saw nearly $11.5 billion in outflows while muni bond funds had $734 million in outflows, according to ICI.

In the week following the record-breaking $11 billion in equity withdrawals from long-term mutual funds, both domestic and world stocks are down, totaling just over $1.97 billion in inflows as of Sep. 2, according to ICI. Bond funds withdrawals meanwhile have slowed to just over $6.3 billion in outflows, a total of $5.2 billion in total U.S. mutual fund withdrawals during this period, ICI says.

McCartan says the market volatility should be a sign for portfolio managers to tread lightly.

"They shouldn't all roll back into these, but they should diversify their portfolios into different types of investments that arguably have not gone up and are fairly attractive so to speak," McCartan says.


Dan Sondhelm, senior vice president of SunStar Strategic, explains that this is the time for managers to take command of their brand and maintain a line of open communication.

"Your sales people should be working double duty," Sondhelm says.

"Your call centers should be prepared for talking with unhappy investors. Your portfolio managers should spend time taking to clients, media, working with marketing departments - to create videos, webinars, content - to show they are sticking to their disciplined process and still in charge, if this is in fact true," Sondhelm suggests. "Of course they should first be managing money."

This, he says, should not be something to start building now, however. Sondhelm often preaches the importance of sticking to your marketing plan prior to an economic downturn so that when the time comes, managers are prepared.


SEC officials are now reviewing whether they should revise certain safeguards put in place after the May 2010 flash crash, due to concerns that those protections contributed to the problems for ETFs, said a person familiar with the agency's discussions, who asked not to be named because the examination is in its early stages. The Treasury Department is also looking into the market volatility.

The New York Stock Exchange, whose Arca venue hosts trading for many ETFs, is studying how to enhance its rules and systems in order to ensure that trading remains orderly "during extreme market-wide events," said Steve Crutchfield, NYSE's head of ETFs, options and bonds.

The SEC's inquiry will build on an effort the agency launched in June, which sought answers to more than 50 questions in a request for public comment about how ETFs and similar fund products trade. - With Bloomberg News. 

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