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Takeaway: The trend of smaller bond fund outflows continued in the most recent week but still both taxable and tax-free bond funds booked outflows

Investment Company Institute Mutual Fund Data and ETF Money Flow:

Equity mutual fund inflow accelerated week-to-week to $5.2 billion for the 5 day period ending September 11th, up from the $903 million inflow the week prior

Fixed income mutual fund outflows also improved but still resulted in a $5.5 billion withdrawal by investors, an improvement from the $6.7 billion draw down last week

Within ETFs, passive equity products experienced an large inflow of $10.3 billion, the best weekly period in 2 months with bond ETFs flows also experiencing positive trends with a $1.4 billion inflow


ICI Fund Flow Survey - Taxable Bond Outflows Improving on the Margin - Muni's Just Getting Crushed - ICI chart 1

For the week ending September 11th, the Investment Company Institute reported improvements in both equity and fixed income mutual fund flows however with bond trends simply booking a smaller outflow. Total equity fund flow totaled a $5.2 billion inflow which broke out to a $2.7 billion inflow into international equity products and a $2.4 million inflow in domestic stock funds. These trends were an improvement from the prior week's total equity fund inflow of $903 million. Including this acceleration in stock fund flows, the year-to-date weekly average for 2013 now sits at a $2.6 billion inflow for total equity mutual funds, a substantial improvement from the $3.0 billion outflow averaged per week in 2012.

On the fixed income side, outflow trends continued for the week ending September 11th with the aggregate of taxable and tax-free bond funds combining to lose $5.5 billion in fund flow. The taxable bond category specifically shed $2.8 billion in the most recent period versus the $4.7 billion loss last week. Tax-free or municipal bonds continued their sharp outflow trends losing another $2.7 billion in the week ending September 11th, continuing its trend from last week which experienced a $2.0 billion outflow and the 10th consecutive week over the $2.0 billion outflow mark. Franklin Resources (BEN) continues to have the most exposure in our coverage group to declining Municipal bond trends with over 10% of its assets-under-management in the tax-free category. The 2013 weekly average for fixed income fund flow has now drastically declined from 2012, now averaging a $464 million weekly outflow this year, a far cry from the $5.8 billion weekly inflow averaged last year.

Hybrid funds, or products that combine both fixed income and equity allocation, continue to be the most stable category bringing in another $1.2 billion in the most recent weekly period, an improvement from the $349 million inflow the week prior. The year-to-date weekly average inflow for hybrid products is now $1.6 billion for '13, almost a 100% increase from 2012's $911 million weekly average.

ICI Fund Flow Survey - Taxable Bond Outflows Improving on the Margin - Muni's Just Getting Crushed - ICI chart 2

ICI Fund Flow Survey - Taxable Bond Outflows Improving on the Margin - Muni's Just Getting Crushed - ICI chart 3

ICI Fund Flow Survey - Taxable Bond Outflows Improving on the Margin - Muni's Just Getting Crushed - ICI chart 4

ICI Fund Flow Survey - Taxable Bond Outflows Improving on the Margin - Muni's Just Getting Crushed - ICI chart 5

ICI Fund Flow Survey - Taxable Bond Outflows Improving on the Margin - Muni's Just Getting Crushed - ICI chart 6

Passive Products - Large Equity ETF Inflow:

Exchange traded funds experienced positive trends for the week ending September 11th with a massive equity inflow and also a stable fixed income subscription. Equity ETFs gained $10.3 billion, the biggest inflow in 8 weeks for equity ETF products and the 5th largest inflow for the category in all of 2013. Including this week's inflow, 2013 weekly average equity ETF trends are averaging a $2.8 billion weekly inflow, an improvement from last year's $2.2 billion weekly inflow average.

Bond ETFs also had a positive week with a stable $1.4 billion inflow which was a slight decline from last week's $2.4 billion subscription. Including this sequential drop in the most recent period the 2013 weekly bond ETF average is now just a $375 million inflow for bond ETFs, much lower than the $1.0 billion average weekly inflow from 2012.

ICI Fund Flow Survey - Taxable Bond Outflows Improving on the Margin - Muni's Just Getting Crushed - ICI chart 7

ICI Fund Flow Survey - Taxable Bond Outflows Improving on the Margin - Muni's Just Getting Crushed - ICI chart 8

HEDGEYE Asset Management Thought of the Week: Quantitative Easing...To Infinity and Beyond:

With the renewed emphasis on pumping liquidity into the credit markets and beyond as articulated by the Fed Reserve yesterday, we highlight the corresponding historical reaction of the asset management stocks in 1 week; 1 month; and 3 month time-frames. While each announcement was made in very different market conditions (for example the announcement of QE1 in 2008 was made in a Bear market for all stocks versus the announcement of QE2 in November of 2010 which was made in recovering equity markets), we none-the-less estimate the average stock reaction for all 4 current rounds of Quantitative Easing (QE) is useful for investors to understand. The averages point to the most favorable positive reaction for Blackrock shareholders, with BLK stock having averaged a 4%; 4%; and an 11% return in the 1 week; 1 month; and 3 month periods following major Fed QE announcements, the best reaction in the asset management group. This is likely because of the firm's substantial emerging markets business (which is 10% of the entire EM assets outstanding when including ETFs and mutual funds) which have historically benefited with lower or easing credit conditions in developed market economies. The leading real estate and balanced fund franchise at Invesco (IVZ) has also reacted positively to QE announcements as lower rates and easing credit conditions makes these yield based products more competitive. IVZ stock has averaged a 5%; 4%; and 5% return over the various stages of QE announcements in the 1 week; 1 month; and 3 month time-frames, the second best beneficiary of these announcements.  


 ICI Fund Flow Survey - Taxable Bond Outflows Improving on the Margin - Muni's Just Getting Crushed - ICI chart 9

Jonathan Casteleyn, CFA, CMT

 

Joshua Steiner, CFA