Credit: Shutterstock photoBy Vanguard :
Key highlights
- Our 1-month risk speedometer rose in September but remained below its 5-year average. Despite the rise, our 3- and 12-month speedometers remained below their 5-year average as well.
- Net cash flows into equity funds and ETFs overall once again were in the black, at $14.1 billion, but investors continued to pull cash from U.S. equity funds and ETFs. U.S. bond funds and ETFs gathered $30.2 billion, and money market funds took in $25.0 billion.
- U.S. equity performance has been strong, but net flows have not. An increasing emphasis on asset allocation rather than fund selection may be taking root.
Global equity markets climbed 2.1% in September, as represented by the FTSE Global All Cap Index. After experiencing net outflows in August, global equity funds and ETFs once again enjoyed positive net flows, collecting a net $14.1 billion in September. However, investors continued to favor less risky assets, investing $30.2 billion in U.S. bond funds and ETFs and $25.0 billion in money market funds.
While U.S. stocks performed positively, an interesting trend continued in equity flows. September was the seventh consecutive month that non-U.S. equity funds and ETFs collected more dollars than U.S. funds and ETFs. Developed international and emerging markets funds gathered $9.6 billion, while U.S. funds lost $6.0 billion, their sixth consecutive monthly net outflow. (Net sector flows were strong, accounting for the overall $14.1 billion in net inflows for equity products.)
Bonds were not to be outdone. September was the ninth consecutive month that investors poured money into U.S. bond funds and ETFs. The $30.2 billion net intake represented 1.0% of the starting asset base at the end of August, the seventh-largest monthly haul based on dollars (but a less impressive 59th-largest for percentage of base) since data began being collected in 1993. For the nine months ended September 30, investors allocated a net $244.1 billion to U.S. bond funds and ETFs, or nearly 9% of the category's assets on December 31, 2016.
Given the continued investor preference for less risky assets, the 1-month risk speedometer settled below its 5-year average for the third consecutive month (albeit at a higher level than the month before).
Another below-average 1-month speedometer continued to pull down the 3- and 12-month speedometers. The 3-month speedometer is now at its lowest level since February 2016, while the 12-month speedometer remains below its 5-year average.
Is the trend toward asset allocation improving behavior?
So far in 2017 the U.S. equity market has hit new highs on more than 40 occasions, with low volatility and minor (if any) pullbacks. Such strong equity returns have been common for the majority of the past nine years. Yet we have seen low and, in many cases, negative net U.S. equity flows. Risk appetite is low, as evidenced by our speedometers at or near their bottom-quartile levels.
Digging deeper, we see that net non-U.S. flows have outpaced net U.S. flows significantly for the 3-, 5-, and 10-year periods ended September 30 despite U.S. equity performance being 4% to 6% higher (compounded annually) over those periods. Consider, too, that U.S. large-capitalization growth funds have seen negative net flows over the 1-, 3-, 5-, and 10-year periods despite being one of the best-performing U.S. categories.
Why is this? This isn't what we'd expect. Have investors switched from being trend followers to being contrarians? While we have long educated investors on the perils of chasing performance, we doubt that investors as a whole have truly changed behavior this dramatically.
While causation is always difficult to ascertain in the capital markets, one viable explanation for this unconventional performance/flows trend is that investors are increasingly giving more thought to asset allocations rather than collecting funds. We can see this with the growth in all-in-one options, especially target-date funds.
Is this the new (wonderful) normal? We'll know better if we see significant changes in flows, or if we experience negative equity returns. In traditional bear markets, investors move out of equity markets during and after the decline. If that were to happen again, it would certainly challenge our hypothesis about investors' greater focus on asset allocation. However, maintaining balanced flows during a market sell-off would boost the idea that investors' behavior has shifted. Time will tell.
For now, the fact is that investors are not going "all in" despite continued strong performance and low volatility.
Highest net inflows and outflows
More about Vanguard's risk speedometers
We've long tracked industry net cash flows to develop insights into what investors, collectively, are doing with a substantial portion of investable assets. 1 Our risk speedometers-our unique lens on investor behavior that we introduced in January-and related cash-flow research also highlight trends that may not be apparent in raw cash-flow data. The result is a nuanced picture of how investors behave. These nuances sometimes reveal that the reality of investor behavior is more complex than conventional wisdom suggests.
Fran Kinniry, Don Bennyhoff, and Yan Zilbering of Vanguard Investment Strategy Group developed the risk speedometers to gauge the level of risk investors are taking in a given period. It's simply the difference in net cash flow between higher-risk asset classes, such as stocks, and lower-risk asset classes, such as fixed income. The speedometers compare investors' current risk-taking with longer-term averages.
1 According to data from Morningstar, Inc., assets under management for U.S. open-end mutual funds, money market funds, and ETFs totaled $17.7 trillion as of December 31, 2016.
Written by Vanguard
Notes:
- All investing is subject to risk, including the possible loss of the money you invest.
- Diversification does not ensure a profit or protect against a loss.
- Investments in bond funds are subject to interest rate, credit, and inflation risk.
- Foreign investing involves additional risks, including currency fluctuations and political uncertainty.
(© 2017 The Vanguard Group, Inc. All rights reserved.)
See also Washington Prime Group: Assessing The Risk Of A Dividend Cut on seekingalpha.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
