ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling

Takeaway: Equity funds posted their 3rd consecutive robust week with bond funds outflowing again - we also highlight our favorite idea TROW

Investment Company Institute Mutual Fund Data and ETF Money Flow:

Total equity mutual fund flow for the week ending November 6th was a robust $9.0 billion, the fourth best week in all of 2013. Domestic equity mutual fund flow was $5.4 billion, an acceleration from the week prior with world equity funds collecting $3.6 billion in new investor capital. Total equity mutual fund trends in 2013 now tally a $3.0 billion weekly average inflow, a complete reversal from 2012's $3.0 billion weekly outflow 

Fixed income mutual funds continued persistent outflows during the most recent 5 day period with another $4.3 billion withdrawn from bond funds. This week's draw down worsened sequentially from the $4.1 billion outflow the week prior which has now forced the 2013 weekly average for all fixed income funds to an $885 million outflow which compares to the strong weekly inflow of $5.8 billion throughout 2012

ETFs experienced declining weekly subscriptions in the most recent 5 day period, with both equity and fixed income ETFs seeing declining flows week-to-week. Passive equity products lost $4.9 billion for the 5 day period ending November 6th, a sequential weekly reversal from an inflow the week prior, with bond ETFs experiencing a $74 million inflow, also a sharp deceleration from the week before. ETF products also reflect the 2013 asset allocation shift, with the weekly averages for equity products up year-over-year versus bond ETFs which are seeing weaker year-over-year results

ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI 1

For the week ending November 6th, the Investment Company Institute reported the 4th best week in 2013 for equity inflows with over $9.0 billion flowing into total equity mutual funds. The breakout between domestic and world stock funds separated to a $5.4 billion inflow into domestic stock funds and a $3.6 billion inflow into international or world stock funds. Both results for the most recent 5 day period within stock funds were above the 2013 weekly averages, with the domestic stock fund 2013 weekly mean at just a $552 million inflow and world stock funds having averaged a $2.5 billion weekly inflow during 2013. The aggregate inflow for all stock funds this year now sits at a $3.0 billion inflow, an average which has been getting progressively bigger each week and a complete reversal from the $3.0 billion outflow averaged per week in 2012.

On the fixed income side, bond funds continued their weak trends for the 5 day period ended November 6th with outflows staying persistent within the asset class. The aggregate of taxable and tax-free bond funds booked a $4.3 billion outflow, a sequential deterioration from the $4.1 billion lost in the 5 day period prior. Both categories of fixed income contributed to outflows with taxable bonds having redemptions of $3.5 billion, which joined the $833 million outflow in tax-free or municipal bonds. Taxable bonds have now had outflows in 18 of the past 23 weeks and municipal bonds having had 23 consecutive weeks of outflow. 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 $885 million weekly outflow, a sharp reversal from the $5.8 billion weekly inflow averaged last year.

Hybrid mutual funds, products which combine both equity and fixed income allocations, continue to be the most stable category within the ICI survey with another $1.3 billion inflow in the most recent 5 day period. Hybrid funds have had inflow in 19 of the past 21 weeks with the 2013 weekly average inflow now at $1.6 billion, a strong advance versus the 2012 weekly average inflow of $911 million.

ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI revised chart 2 final

ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI 2 revised

ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI 4

ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI 5

ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI 6

Passive Products:

Exchange traded funds produced weak trends within the same 5 day period with equity ETFs posting a $4.9 billion outflow, a sequential decline from the strong $8.7 billion subscription the week prior. The 2013 weekly average for stock ETFs is now a $3.2 billion weekly inflow, nearly a 50% improvement from last year's $2.2 billion weekly average inflow.

Bond ETFs managed an slight inflow for the 5 day period ending November 6th with a $74 million subscription, also a sequential decline from the week prior which netted a $551 million inflow for passive bond products. Taking in consideration this most recent data, 2013 averages for bond ETFs are flagging with just a $303 million average weekly inflow for bond ETFs, much lower than the $1.0 billion average weekly inflow for 2012.

ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI 7 revised

ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI 8 revised

Hedgeye Asset Management Thought of the Week - TROW is Historically Cheap:

Our favorite asset management stock continues to be T Rowe Price which has one of the highest exposures to equity products (mutual funds and separately managed accounts) in the investment management industry. TROW drives 83% of its revenues from equity products and directly benefits from the emerging reversal in equity fund flows from redemptions last year in 2012, to subscriptions and inflows this year in 2013. T Rowe shares have always traded at an industry premium on a forward P/E basis because of its high cash balance ($1.6 billion in cash on its balance sheet), strong free cash flow generation ($1.2 billion of free cash flow generation for 2014), and no debt, however shares currently are the cheapest they have been relative to the rest of the asset management group in 3 years. Currently TROW shares fetch just a 12% premium to a group average forward P/E (a 3 year low) versus a 23% average premium since 2010. We estimate that the current institutional outflow that TROW is experiencing from a handful of sovereign Asian wealth funds has compressed the stock's valuation but being that this issue is not a systemic situation, we would expect TROW shares to unwind this discount and appreciate versus the rest of the industry.

ICI Fund Flow Survey - Equities Strong...Bonds Weak...TROW Valuation is Compelling - ICI 9

Jonathan Casteleyn, CFA, CMT

 

Joshua Steiner, CFA