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Contents
Introduction .................................................................................................................................................. 3 Flows by Asset Class: Dollars......................................................................................................................... 4 Flows by Asset Class: % of Assets.................................................................................................................. 5 IG Bonds: Flows in % of Assets ...................................................................................................................... 6 HY Bonds: Flows in % of Assets ..................................................................................................................... 7 US Equities: Flows in % of Assets .................................................................................................................. 8 International Equities: Flows in % of Assets ................................................................................................. 9 Precious Metals: Flows in % of Assets ........................................................................................................ 10 Risk Appetite: High ...................................................................................................................................... 11 Mutual Fund Flows: Domestic Equity ......................................................................................................... 12 Correlation: Equity MF Flows and S&P 500 ................................................................................................ 13 Mutual Funds Flows: International Equity .................................................................................................. 14 Mutual Fund Flows: Taxable Bond Funds ................................................................................................... 15 Mutual Fund Flows: Equity Versus Bond .................................................................................................... 16 Conclusions ................................................................................................................................................. 18
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Source: IndexUniverse.com Source: Morningstar Direct US Open-end asset flows update, January 2013 3 Excluding $2.6 trillion in US Money Market Mutual Funds
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One way to analyze flows is to aggregate them by asset class in dollar terms. Above you see cumulative flows over the last 12 months. Observations: Real-estate remained at $5bn of inflows. Precious metal-related ETF's saw outflows of $11bn (7bn outflows) International equities experienced $9bn (previous month: $9) billion in inflows Domestic equities saw inflows of $27bn ($21bn) Flows into high-yield bond ETF's are barely positive. HYG (high-yield ETF) had its third consecutive month of inflows while JNK (junk) experienced its fourth consecutive month of outflows. Investment-grade (IG) bonds reported outflows of $1bn ($3bn inflows)
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An inflow of $1bn does not matter much for SPY with assets over $100bn. However, it might matter for the $5bn Russel MidCap ETF (IWR). It therefore makes sense to look at flows relative to assets. Observations: Real estate shows the strongest relative inflows of 47% (previous report: 48%) of their assets. Precious-metal related ETF's saw outflows of 10% (-6%) International equity ETF's enjoyed inflows of 26% (26%) US equity ETF's grew by 27% (23%) Inflows into high-yield bond ETF's increased to 12% of AuM (5%) Investment grade ETF's saw flows of- 3% (+3%) of their assets
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Investor preferences change, and so do flows. Looking at rolling changes in flows can reveal interesting trends. Observations: TLT (20+ year Treasury bonds) had the first outflows after three consecutive months of inflows TIP (Treasury inflation-protected bonds) had outflows in 10 out of the last 12 months Enthusiasm for BND (total bond market) continued to cool off LQD (investment-grade corporate bonds) had six months of consecutive outflows Municipal bond ETF (MUB) had 21 consecutive months of inflows
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Observations: The massive inflows into speculative bond ETF's seen in 2012 have subsided Junk-bond ETF (JNK) had four consecutive months of outflows of $2bn or 16% of assets High-yield ETF (HYG) saw three months of inflows after five consecutive months of outflows Waning demand from high-yield ETF's might make it more difficult for lowly rated borrowers to access capital markets or could lead to stricter covenants Leveraged buy-outs (LBO's) depend on a receptive high-yield market for financing; if inflows stop, additional supply would likely be absorbed only at higher yields
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Observations: Nasdaq (QQQ) and Dow Jones (DIA) related ETF's have lagged overall inflows into domestic equity ETF's. This might have to do with the end of the bubble in the stock price of Apple, which is heavily weighted in Nasdaq benchmark indices. For the Dow Jones we can only speculate investors might finally realize the nonsensical nature of a price-weighted index. Inflows into IVV remained strong as indices made new all-time highs in May Inflows into IWR (Russell MidCap) cannot keep pace with the large cap ETF's
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Observations: In good times, investors feel confident and venture abroad in search of higher returns Broad international equity ETF (EFA) saw inflows after two consecutive month of outflows Emerging Markets ETF (EEM) continued to experience large outflows ($8bn, or 16% of assets, over past four months) Emerging Markets ETF (VWO) also had large outflows ($3bn, or 6% of assets, over the past three months)
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Observations: Interest in precious-metal related investments is, with the exception of silver, close to a freezing point Flows into the Senior Gold Miners ETF (GDX) were concentrated over two months (August and September 2011), coinciding with the all-time high in spot gold prices ($1,923/oz) Despite negative performance, GDX has not seen any outflows for the fourth consecutive month GLD experienced five consecutive month of outflows with a combined $16bn, or 35% of today's assets, leaving the ETF Silver ETF (SLV) had the worst monthly outflow (-$330m) since June 2011
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Here, we calculate the ratio between two sub-groups of the same asset class: speculative bond (HYG, JNK) to non-speculative bond ETF's (TLT,TIP, BND, LQD, MUB) international equity (VWO, EFA, EEM) to domestic equity ETF's (SPY, QQQ, IVV, VTI, DIA, IWR)
We used relative assets under management instead of relative flows as the time series are quite volatile. Observations: Risk appetite is cooling off based on investor's preference for domestic over international equities.
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Observations: Long-term domestic equity mutual fund outflows continued for the second consecutive months Outflows have occurred on 23 out of the past 25 months.
Conclusions: The retail investor has realized two things: Paying fees for active management does not pay (majority underperforms over longer periods) Global stock markets have been propped up by central bank actions and are overvalued
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Observations: Despite few months of equity MF inflows (dots above the horizontal zero line) a certain positive correlation exists with the performance of the S&P 500 Index However, excluding the two extremes (October 2008, April 2009), the coefficient of determination declines considerably (r2 = 0.28 instead of 0.45) Using 3-months data does not lead to significant improvements in the coefficient of determination (r2 = 0.51; 0.26 excluding extremes)
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Observations: Inflows into long-term international equity mutual funds continued for the fifth consecutive month
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Observations: Taxable bond mutual funds have shown inflows in 51 out of the past 53 months Despite record-low yields and negative real returns, investors seem to prefer the "sparrow in the hand"
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Observations: Outflows from domestic equity mutual funds have slowed down Investors still prefer taxable bond funds
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Observations: Municipal bond mutual funds recovered from the "Whitney" crash (on December 19, 2010, Meredith Whitney predicted hundreds of billions in losses from defaults on TV) However, rating agencies are waking up to the growing hole of underfunded pension plans A rise in income tax rates would make muni bonds (tax-exempt) more attractive An abolishment of tax-preferred status of muni bonds would lead to significant losses for their owners Private investors owning muni bonds directly have usually not the capability to adequately judge the risks associated with individual bonds
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