Investors Flee US Equity Funds Amid Persistent Inflation Worries

In a continuation of the previous week's trend, investors have withdrawn from US equity funds for the second consecutive week, driven by persistent inflation worries and diminishing expectations for a US Federal Reserve rate cut in June. This shift in investor sentiment is consistent with previous market trends, where investors have been cautious about equity investments due to economic uncertainties and interest rate policies. The recent increase in consumer prices and the Fed's stance on interest rates have further exacerbated these concerns, leading investors to seek safer investment options such as bond funds and money market funds.

The S&P 500 is on course to finish the year more than 25% higher than where it began, indicating a strong bull market. However, some funds have underperformed the index, and investors have been adjusting their portfolios accordingly. For instance, Marlborough, a DFM (Discretionary Fund Manager) in our database, enjoyed the run of Natixis Loomis Sayles US Equity Leaders, which returned 37% in 2024. However, they have recently cut their exposure to this fund, citing concerns about concentration risk. Similarly, Albert E Sharp held Baillie Gifford American, which also returned 37% in 2024, but they reluctantly sold out in January 2022 due to overstretched valuations, missing out on significant gains.



City Asset Management uses Dodge & Cox US Stock, a value-oriented fund, as a satellite fund to access value exposure in their model portfolios. Although this fund has not beaten the headline index over one, five, or ten years, City AM acknowledges that relative performance has been weak compared to the Russell 1000 Value index. However, they note that absolute performance has remained attractive, and its diversification characteristics away from their growth bucket have been valuable.

Inflows into equal-weight funds, such as L&G S&P 500 Equal-Weight Index, have been increasing, with Marlborough and other DFMs joining a "veritable host" of DFMs who have bought into this strategy in 2024. This move dilutes concentration risk by allocating equal weights to all stocks in the index, rather than relying on market capitalization. Additionally, investors have been allocating funds to money market and government bond funds, with $16.1 billion and $3.35 billion invested in these safer options, respectively, in the week to Aug. 14, 2024.

Investors' risk appetites and expectations for future market performance are reflected in their allocation choices. By seeking safer options and diversifying their portfolios, investors aim to preserve capital amid economic uncertainty and market volatility. As the market cycle changes, investors may also benefit from value stocks outperforming growth-dominated markets. However, the persistent inflation worries and the Fed's stance on interest rates continue to influence investors' decisions, leading to a cautious approach to equity investments.

In conclusion, investors' withdrawal from US equity funds for the second successive week is driven by persistent inflation worries and diminishing expectations for a US Federal Reserve rate cut in June. This trend is consistent with previous market trends, where investors have been cautious about equity investments due to economic uncertainties and interest rate policies. As the market cycle changes, investors may benefit from value stocks outperforming growth-dominated markets, but the persistent inflation worries and the Fed's stance on interest rates continue to influence investors' decisions.