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Takeaway: ICI's weekly data marked outflows across the board in both stocks and fixed income with D.C. gridlock having spooked investors last week

Investment Company Institute Mutual Fund Data and ETF Money Flow:

Equity mutual funds joined all product classes last week with outflows in front of the gridlock in Washington with a $3.1 billion outflow, a slight deceleration from the prior week's outflow of $3.3 billion. Despite these soft trends near term, total equity mutual funds have reversed weekly outflow trends from last year and are averaging a $2.5 billion weekly inflow in '13 versus 2012's $3.0 billion weekly outflow 

There wasn't even a flight to quality last week, with fixed income mutual funds booking redemptions of $2.5 billion, an acceleration from the week prior's $397 million outflow and now sending 2013's weekly average fund flow to a negative $561 million. This compares to the weekly inflow from last year in 2012 of $5.8 billion for fixed income funds

ETFs were also a source of funds last week, with outflows in both equity and fixed income products. Passive equity products experienced outflows of $4.7 billion for the 5 day period ending October 9nd with Bond ETFs losing $1.3 billion in investor funds during the same time period

In the Hedgeye Thought of the Week, we outline our 5 main takeaways from yesterday's conference call of industry leader BlackRock, the largest asset manager in the world with now over $4 trillion in assets-under-management


ICI Fund Flow Survey and our take on the BlackRock Conference Call - ICI table 1 revised

For the week ending October 9nd, the Investment Company Institute reported another weekly outflow in combined stock funds to the tune of $3.1 billion, a slight improvement from the $3.3 billion outflow the week prior. The $3.1 billion outflow for the week broke out to a $2.0 billion inflow into international equity products and a $5.1 billion outflow within domestic stock funds. The equity category has been a tale of two tapes recently with domestic equity funds having had outflows in 8 of the past 13 weeks compared to international equity funds which have had inflows every week in the past 13. Despite this weak run in domestic stock fund flows, the year-to-date weekly average for 2013 for all equity mutual funds now sits at a $2.5 billion, a complete reversal from the $3.0 billion outflow averaged per week in 2012.

On the fixed income side, bond funds were not able to generate any new investor interest despite the uncertainty created by Washington and for the 5 days ending October 9nd, the aggregate of taxable and tax-free bond funds booked a $2.5 billion outflow. Both categories of fixed income contributed to outflows with taxable bonds having outflows of $1.5 billion which joined a $1.0 billion outflow in tax-free or municipal bonds. While the sharp outflows that marked most of the summer and the start of the third quarter have moderated, the appetite for bonds has hardly rebounded. The 2013 weekly average for fixed income fund flows is now a $561 million weekly outflow, a far cry from the $5.8 billion weekly inflow averaged last year.

ICI Fund Flow Survey and our take on the BlackRock Conference Call - ICI table 2

ICI Fund Flow Survey and our take on the BlackRock Conference Call - ICI table 3

ICI Fund Flow Survey and our take on the BlackRock Conference Call - ICI table 4

ICI Fund Flow Survey and our take on the BlackRock Conference Call - ICI table 5

ICI Fund Flow Survey and our take on the BlackRock Conference Call - ICI table 6

Passive Products:

Exchange traded funds also experienced weak trends last week with equity products booking a large outflow and bond ETFs also experiencing mild redemptions. Equity ETFs lost $4.7 billion in funds, a reversal from the $1.3 billion inflow in the prior week and also down from the impressive $25.8 billion inflow three weeks ago. Including this week's outflow however, 2013 weekly average equity ETF trends are averaging a $3.1 billion weekly inflow, an improvement from last year's $2.2 billion weekly inflow average.

Bond ETFs experienced their second consecutive weekly redemption of $1.3 billion which was a slight improvement from the $2.0 billion in funds lost the week prior. Including this most recent redemption within passive bond products, the 2013 weekly bond ETF average is flagging at just a $325 million inflow, much lower than the $1.0 billion average weekly inflow from 2012.

ICI Fund Flow Survey and our take on the BlackRock Conference Call - ICI table 7

ICI Fund Flow Survey and our take on the BlackRock Conference Call - ICI table 8

Hedgeye's Asset Management Thought of the Week:

We view the BlackRock earnings conference call as an important indication of broader asset management industry trends with the wide spectrum that the $4 trillion asset manager covers. Our top 5 takeaways from the firm's conference call yesterday are:

1.)  CEO Larry Fink had an interesting perspective on potential future communication from the Federal Reserve. In essence his commentary alluded to a Fed that will be on hold in regard to tapering for longer than expected as the real byproduct of the current government shut down has not been a stock market sell off but potentially a Fed that will want to evaluate the impact of the shut down and will wait longer than expected to start any reduction in bond buying. Aside from BlackRock's inherent bias to pitch its strong fixed income franchise which would benefit in this scenario, this outcome may make some sense considering the change in Fed Chairman upcoming (any current communication change will wait to be made after the Fed transition).

2.) The firm's scientific equity or quant products experienced outflows in the quarter which were performance related but the category continues to remain out of favor according to the company. This has the biggest implication for Janus Capital (JNS) which has $41.3 billion in quant assets, over 25% of its total assets-under-management.

3.) One of the fastest growing categories within the firm's third quarter was BlackRock's LifePath franchise which had $3 billion in net inflows in the quarter or a 17% annualized organic growth. While the $70 billion in total LifePath assets is only a small percentage of BLK's overall assets, similar target date funds and the entire 401K category comprise over 15% of assets-under-management at T Rowe Price (TROW), which is a positive read through for them.

4.) While the firm guided down expectations for year-over-year performance fees (citing an abnormally strong period last year on a one time PPIP fee), BlackRock is entering the 4th quarter with some earnings momentum. Period ending assets-under-management are up over 6% quarter-over-quarter which will help base fees and the firm cited only a slight upward drift on marketing spend in the fourth quarter which could be really good for year ending margins.

5.) The firm also alluded to a reversal in flows within its important emerging market franchise. While the second quarter marked outflows in some of its flagship products including the EEM exchange traded fund, the firm saw inflows into the EM category in September which is positive for overall realization rates as these products have some of the highest fees within the BLK product suite. 


Jonathan Casteleyn, CFA, CMT

 

Joshua Steiner, CFA