DC Investors Favor Fixed Income

During 2016, with the help of double-digit returns for U.S. stock indexes, defined contribution (DC) mutual fund assets approached the $4 trillion mark. With over 60% of these assets—excluding funds-of-funds—in the domestic equity bucket at year end, the strong returns helped the DC market grow by 8% for the year. Generally, allocations have remained fairly static over the last decade, though taxable bond funds have recently eroded several percentage points away from their equity counterparts.

DC flows last year, however, exhibited a decided shift, U.S. equity funds being hit with outflows of $14.6 billion while U.S. taxable fixed-income funds took in $17.7 billion. In contrast, international equity funds saw inflows of $12.9 billion against a relatively flat $91 million of outflows from global taxable fixed-income funds. Excluding funds-of-funds, DC mutual fund net inflows amounted to $15 billion. The addition of flows related to funds-of-funds—largely attributed to target-date funds (TDFs)—yielded an additional $37 billion of inflows, resulting in $52.5 billion of total DC mutual fund inflows for the year.

Despite all the attention to TDFs, they still represent just over 5% of industrywide mutual fund totals and 15% of DC mutual funds. Still, assets in the strategies have increased by 43% over the last three years. Over 2016, TDFs saw $64 billion of net inflows, whereas risk-based lifecycle funds experienced outflows of $17 billion, and non-lifecycle funds were hit with $76 billion of outflows.

Retirement-specific flows in both lifecycle categories were muted as compared with the industry overall; however, non-lifecycle funds experienced close to a $100 billion differential between the industry’s outflows and DC’s inflows.

A distant second to domestic equity in terms of retirement asset-allocation percentage, international equity funds nevertheless managed to attract close to $13 billion of net new flows in 2016. This momentum was led by the foreign large blend, world allocation, diversified emerging market, and world stock categories, while the largest international equity category, foreign large growth, experienced outflows of $3.4 billion for the year. These five categories combine to make up 90% of retirement mutual fund assets in international equity.

Among taxable bond (global) mutual funds, the world bond category accounts for the majority of assets in both DC and the industry overall. Funds in this category experienced 2016 net outflows of $100 million in DC and $8.3 billion across the broader industry, though they were offset with positive flows into emerging markets debt.