June Fund Flows Suggest Overall Rotational Shift by Investors
When the Federal Reserve (the “Fed”) announced in June that the U.S. economic recovery was showing such progress, based on their assessments at that time, that they may consider starting to taper their bond buying program (i.e. quantitative easing) sooner than originally expected, perhaps as early as the Fall of 2013, investors fled the markets; bonds and equities, in droves. Order was eventually restored to the markets as investors came to their senses, realizing after some additional time to digest the entirety of the comments from the Fed, that the Fed did not suggest that they were going to start raising interest rates, or even sell bonds, in 2013, the damage was already done. Mutual fund and Exchange-traded fund (ETF) flows for the month of June provide evidence of this exiting behavior on the part of investors as well as what we believe to be a re-positioning of portfolios by investors (presumably with diversified growth objectives) to brace for an environment of rising interest rates – where economic, and stock market, growth would be expected to continue to progress to some degree.
On top of the rotational shift of investors moving out of fixed income into equities during the early stages of 2013, investors fled fixed income funds at an even higher velocity in June of 2013. According to Lipper’s FundFlows Insight Report dated June 30, 2013, the following were highlights of mutual fund flow activity:
- For the first time in the last twelve (12) month period, mutual fund investors were net redeemers of fund assets in June (i.e. $59.9 billion)
- Mutual fund investors redeemed the largest amount of bond funds since at least January 2008, registering approximately $65.2 billion of outflows
- Bond fund outflows were equally split across long-term and short/intermediate term maturity types
- Taxable bond funds (i.e. $48.5 billion) registered much larger outflows than municipal bond funds (i.e.$16.6 billion)
- Stock & mixed equity funds registered net inflows for the month of June (i.e. $21.8 billion), on top of the net inflow total that they registered in May (i.e. $33.4 billion)
- The net inflows for stock & mixed equity funds in June represented the sixth consecutive month of strong inflows for this mutual fund type
- Whereas, significant funds flowed into money market funds in May, mutual fund investors were net redeemers of money market funds in June (i.e. $16.4 billion)
Net Flows by Major Fund Types, June vs. May 2013 ($ Billion)
|Stock & Mixed Equity Funds|
|Money Market Funds|
Source: Lipper Research Series, FundFlows Insight Report, June 30, 2013
According to this same report, the following were highlights of ETF flow activity:
- For the first time in the last nineteen (19) month period, ETFs suffered net redemptions for the month of June 2013 (i.e. $18.8 billion)
- The June outflow total marked the highest outflow amount for ETFs on record
- In contrast to mutual funds, ETF investors were net redeemers of both stock & mixed equity ETFs (i.e. $9.6 billion) as well as bond ETFs (i.e. $9.2 billion) experienced net outflows
- Not all equity-based ETFs suffered net redemptions for the month of June as international and sector-based ETFs accounted for the majority of the outflow totals:
- U.S. diversified equity ETFs ($4.5 billion) posted their eighth consecutive month of inflows with Large-Cap Value leading all of the other classifications with a net inflow total of $2.0 billion
- World equity ETFs suffered its first month of net redemptions in the last three (3) months and its largest month of redemptions on record (i.e. $10.9 billion)
- For the second month in a row, sector equity ETFs suffered net redemptions (i.e. $3.2 billion)
Net Flows by Major ETF Types, June vs. May 2013 ($ Billion)
|Stock & Mixed Equity Funds|
- Source: Lipper Research Series, FundFlows Insight Report, June 30, 2013
At Hennion & Walsh, we prefer to look at both mutual fund and ETF flow information to discern overall investor sentiment as different types of investors generally tend to invest one product type over the other. For example, institutional investors seem to continue to gravitate towards ETFs for a wide variety of reasons while retail investors, fueled in large part by 401(k)/Defined Contribution Plan investments, generally tend to use a great deal of mutual funds for their own household portfolios. Overall, although fund assets (and number of funds) are flowing to ETFs at a greater relative percentage than mutual funds in recent years, mutual funds still hold a significant advantage over ETFs in terms of overall assets and overall number of funds.
Based on the fund flow information presented above, we would contend that the rotational shift from bond funds to equity funds (specifically U.S. equity funds), not only continued in June but even picked-up pace overall based on the net totals across both fund types. To this end, at the beginning of July, the Investment Company Institute (ICI) estimated that equity funds held a roughly 3-to-1 advantage in terms of net fund flows over bond funds thus far in 2013 (though bond funds held a slight advantage of equity funds heading into June).
A preliminary look at July 2013 flow information suggests that the momentum with respect to the bond fundsàequity funds rotational shift is not letting up – at least as it relates to ETFs. According to ConvergEx, over the first twelve (12) trading days of July, money has flowed into ETFs which focus on U.S. equities at a run rate of $2 billion a day. This current rate represents almost four (4) times the pace of flows into ETFs with a focus on U.S. equities that took place during the first half of 2013.