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Investors dumped U.S. stock funds at a historic pace in March

U.S. equity funds, including mutual and exchange-traded funds (ETFs), posted the largest outflows ever recorded in the last weeks of March, the Institute of International Finance said Thursday.

The $40 billion of outflows in the second half of last month marked the highest dollar amount ever leaving U.S. equity funds, a result of investor uncertainty over the rising U.S. fiscal deficit, growing trade war fears, the Federal Reserve raising U.S. overnight interest rates and a number of other fears, IIF reported, citing data from EPFR.

The IIF’s senior director, Sonja Gibbs, told Yahoo Finance the biggest thing on investors’ minds seems to be increasing tensions.

“No one really knows how all of this is going to play out and over what time frame,” Gibbs said. “Given that, the fact that it’s rattled the markets this much suggests that the focus is a little more on underlying worries.”

Investors pulled more money out of U.S. equity funds than ever before, a recent survey from a bank lobbying organization showed.

Gibbs noted that the growth of ETFs as well as investor capital in U.S. mutual funds exaggerated March’s outflows on a historical basis. Still, she said, “it has been a long time since there’s been a drop off like this.”

As a percentage of overall assets invested, the outflows IIF tracked in the second half of March were the largest since 2014, but they fall short of the bloodletting during the  2007-2009 financial crisis. Outflows reached more than 1.3% of total assets under management during the financial crisis, versus about 0.5% during this most recent market selloff, the data show.

Retail investors are fleeing

The outflows are also a reflection of the growing number of so-called retail investors or individuals  who are investing for themselves or a few friends rather than institutional investors who are investing hundreds of millions to trillions of dollars on behalf of pensions or endowments. Bigger fund managers continue to largely be bullish, looking past Trump’s rhetoric.

IIF also reported that there was greater selling of U.S. equities via ETFs in March, where mainly retail inflows have tended to offset outflows from largely institutional mutual funds over the past year or so.

“When you start to introduce some risk back into the equation people start to get a little antsy,” Jim Paulsen, chief investment strategist at the Leuthold Group, told Yahoo Finance in a phone interview. “On average, people get a little bit more defensive. The reasons [for the selling] are as varied as anything. It’s whatever scares you.”

As retail investors have smaller assets they are more easily able – and willing – to sell out of positions after negative headlines or growing uncertainty. In addition to the continued worries over U.S. President Donald Trump’s war of words with China and an escalating tariff battle, the tech sector has also been wrought with fear as Facebook CEO Mark Zuckerberg has been called to testify before Congress and Trump has targeted Amazon as costing U.S. taxpayers “billions” of dollars.

The rest of the world is seeing more subdued outflows

Emerging markets and global equities recorded lower levels of fund outflows, IIF’s data showed, suggesting the investor panic was largely concentrated on the U.S. assets.

EM equities saw reduced inflows of $7 billion in March, compared to $11 billion in February and $28 billion in January, IIF reported. Leuthold’s Paulsen said he believes that investors who are moving out of U.S. stock funds could be doing so to globally diversify their portfolios as international stocks have outperformed the U.S. over the past couple years and have been relatively less vulnerable to the current downturn.

Gibbs, IIF’s senior director, also pointed out that March was particularly notable for its large swings in asset flows. Investors dumped a record $45 billion of weekly funds flowing into stocks during the early part of the month. She also highlighted the high level of U.S. stock valuations.

“High valuations make investors nervous,” Gibbs said. “Nervous investors will be more prone to sell, even if the catalyst – in this case trade tensions – isn’t very clear or defined.”

The current trailing price to earnings ratio on the benchmark S&P 500 is around 24.5, according to the Wall Street Journal. Its historic average is below 20.

Bonds also saw subdued fund flows in March, according to IIF’s data. Despite a late-March bond market rebound, global bond funds took in just $2 billion. All in all, global equity and bond funds combined saw just $12 billion of inflows for the month.

Dion Rabouin is a financial markets reporter for Yahoo Finance. Follow him on Twitter: @DionRabouin.

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