Takeaway: Equity funds posted their 4th consecutive robust week with bond funds outflows worsening - YTD '13 bond outflows aren't abnormal yet
Investment Company Institute Mutual Fund Data and ETF Money Flow:
Total equity mutual fund flow for the week ending November 13th was a strong $7.2 billion, the eighth best week in all of 2013 and the fourth consecutive week over the $7 billion weekly inflow mark. Domestic equity mutual fund flow was $3.9 billion, an slight deceleration from the week prior with world equity funds collecting $3.2 billion in new investor capital. Total equity mutual fund trends in 2013 however now tally a $3.1 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Fixed income mutual funds continued persistent outflows during the most recent 5 day period with another $7.5 billion withdrawn from bond funds, the worst week in over 2 months. This week's draw down worsened sequentially from the $4.2 billion outflow the week prior which has now forced the 2013 weekly average for all fixed income funds to an $1.0 billion outflow which compares to the strong weekly inflow of $5.8 billion throughout 2012
ETFs experienced mixed trends in the most recent 5 day period, with equity products seeing slight outflows and fixed income ETFs seeing slight inflows week-to-week. Passive equity products lost $338 million for the 5 day period ending November 13th, a sequential improvement from the $4.9 billion outflow the week prior, with bond ETFs experiencing a $274 million inflow, also an improvement from the $74 million subscription in the 5 day prior. 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
In the Hedgeye Asset Management Thought of the Week below, we outline that the current 2013 running redemption within fixed income mutual funds is actually still below the prior bond outflow cycles of 1994, 1999, and 2003 which means that even more substantial fixed income outflows would not be abnormal
For the week ending November 13th, the Investment Company Institute reported the 8th best week in 2013 for equity inflows with over $7.2 billion flowing into total equity mutual funds. The breakout between domestic and world stock funds separated to a $3.9 billion inflow into domestic stock funds and a $3.2 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 $628 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 $3.1 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 13th with outflows staying persistent within the asset class. The aggregate of taxable and tax-free bond funds booked a $7.5 billion outflow, a sequential deterioration from the $4.3 billion lost in the 5 day period prior and the worst redemption in 11 weeks. Both categories of fixed income contributed to outflows with taxable bonds having redemptions of $6.4 billion, which joined the $1.1 billion outflow in tax-free or municipal bonds. Taxable bonds have now had outflows in 19 of the past 24 weeks and municipal bonds having had 24 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 $1.0 billion 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 $1.4 billion inflow in the most recent 5 day period. Hybrid funds have had inflow in 20 of the past 22 weeks with the 2013 weekly average inflow now at $1.6 billion, a strong advance versus the 2012 weekly average inflow of $911 million.
Exchange traded funds had mixed trends within the same 5 day period ending November 13th with equity ETFs posting a slight $338 million outflow, a sequential improvement from the larger $4.9 billion redemption the week prior. The 2013 weekly average for stock ETFs is now a $3.1 billion weekly inflow, nearly a 50% improvement from last year's $2.2 billion weekly average inflow.
Bond ETFs managed a slight inflow for the 5 day period ending November 13th with a $274 million subscription, a sequential improvement from the week prior which netted a $74 million inflow for passive bond products. Taking in consideration this most recent data, 2013 averages for bond ETFs are flagging with just a $274 million average weekly inflow for bond ETFs, much lower than the $1.0 billion average weekly inflow for 2012.
Hedgeye Asset Management Thought of the Week - The 2013 Drawdown is Still Below Average:
While the fixed income mutual fund asset class is firmly in outflow with taxable mutual funds having had outflows in 19 of the past 24 weeks and tax-free or municipal bonds having had redemptions in 24 consecutive weeks, we none-the-less highlight that this sequence of outflows is still running below average on a percentage of beginning bond fund assets historically. The drawdowns of 2003-2004, 1, and the notorious bond redemption of 1 all resulted in bigger losses on beginning bond fund outstandings. Respectively, the '03-'04 redemption resulted in 5.0% of beginning bond fund assets being lost, a similar percentage to the 1 bond outflow cycle which drew down over 5.0% of beginning fixed income assets. These losses however were a far cry from the 14.0% of beginning bond fund assets which were redeemed in 1994 when the Federal Reserve surprisingly raised rates at the time. The 2013 redemption sequence, which started in May, has now resulted in nearly $150 billion having been pulled out of bond funds however on a percentage basis, this redemption is just a 3.9% loss on beginning bond fund assets. Thus solely on historical precedent, another $40 billion in bond outflows on the current $3.8 trillion bond fund outstandings would match the losses in '03/'04 and in 1999/2000, however another $380 billion could flow out of the bond category to match the 1994 redemption sequence. In our roll-out of the asset management sector in August, we fore-casted over a $1 trillion shift out of fixed income over a multi-year time period to give investor's a broader perspective.
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
This note was originally published at 8am on November 07, 2013 for Hedgeye subscribers.
“There is no terror in the bang, only in the anticipation of it.”
More than seven years ago, when the lads started @Twitter, I’m not sure they were anticipating today. At the time, there were simply brainstorming new business ideas and an idea for group SMS-ing was sketched out and not too long thereafter Jack Dorsey sent out the first tweet, which was:
“just setting up my twttr”
As I wrote in our Twitter IPO report earlier this week, it was certainly an inauspicious start. I mean, who would have thought a 140 character revolution would have started with that, but it did and with the anticipation of the $TWTR IPO now gone, and all we have left is today’s bang. (Not to be confused with the free fall in the #Euro from the 25 basis point cut in European interest rates.)
I can’t tell you for sure, but given the number of times the investment bankers have raised the offering price (and who doesn’t trust investment bankers!), there seems to be little doubt that there is demand for the offering. So, at the very least, we won’t have a $FB debacle on our hands. Of course, where the stock trades today is anybody’s guess.
In the face of the optimism around @Twitter today, we thought we’d offer some contrarian counter points to the positive outlook for the company. Yesterday, my colleague Hesham Shaaban (to give credit where credit is due Hesham did most of the work, but that’s why I’m the boss after all) and I gave a presentation on Twitter and raised a few flags. So, if you are going to own $TWTR for the long run, here are few things we would consider:
1. #OverseasUnderwhelming – Currently, @Twitter has 179 million monthly active users outside of the United States. This is compared to 53 million MAUs domestically. Shockingly, the company only generated 26% of its consolidated revenue from international markets in Q3 2013. On the metric of advertising revenue / monthly active user, the contrast is even more startling as US ad revenue / user is $2.10 in the U.S. versus $0.23. Or an almost 10x difference. The implication here is that there are structural constraints to monetizing international users, which leads us to the next key issue.
2. #UserGrowthSlowing – In Q3 2013, $TWTR has its lowest sequential growth quarter ever as global monthly active users grew only 6% sequentially. Now, admittedly, this is still meaningful grow off a base of more than 230 million MAUs, but compared to the prior four quarters, which showed 11%, 11%, 10% and 7% sequential growth, this is a marginal slow down.
Interestingly, @Facebook which has a penetration of 55% in the United States, compared to @Twitter’s penetration of 22%, has actually added more absolute users in the U.S. over the past three years. This of course leads to the next question as to how penetrated @Twitter is currently.
3. #Penetration - A recent poll from Reuters/Ipsos suggested 43% of people that have registered for a $twtr accounts have either shut their accounts down, or don’t use it. This compares to 12% for $fb on the same metrics. The implication for @Twitter is that the implied penetration may be much lower. For example, if 43% of users are actually inactive, this suggests a true penetration rate of all internet users in the U.S. of 39%, which implies a short runway of growth domestically.
Certainly, being one of the power users of @Twitter in finance, we do get the blue sky opportunity that @Twitter could evolve into a global cable network and become a true second screen for consumers. The pie for T.V. advertising is north of $70 billion by some estimates, so even a small share of this pie would be meaningful for @Twitter, but between now and then we have a richly valued company that faces business model headwinds.
In the Chart of the Day, we’ve provided a table that shows the multiple you’d have to be willing to pay of market cap / sales to get a certain level of return. As an example, if you buy the stock at $27 per share (effectively the IPO price) and you want a 20% return over the next year or so, you’d have to be willing to pay 15.0x our 2015 revenue estimate. (We have included the 150 million shares that will be dilutive post the IPO in our calculation of market cap.)
I’m not saying that won’t happen, but as Albert Einstein famously said:
“The distinction between the past, present and future is only a stubbornly persistent illusion.”
That all said, even as we have some issues with the @Twitter business model in the short run, there is no denying that the platform is revolutionary in its ability to allow the world to communicate, interact and engage. As my colleague @KeithMcCullough tweeted in 2010 to @matterhornbob:
“twitter is a very comfortable arena for an accountable athlete in this business to compete – we don’t want to hide”
Keep your head up and your tweets on the ice,
P.S. In other news, we’d like to wish a bon voyage to our long-time teammate @RoryAGreen who is leaving us for the confines of @Insead and a MBA. In celebration of this exciting move for Rory, and in appreciation of all his hard work, we will be tapping a keg of Guinness (he is Irish after all!) at our Stamford, CT office at 4pm.
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Please join the Hedgeye Financials Team, Jonathan Casteleyn and Josh Steiner on Thursday November 21st at 11:00am EST for the return of the Hedgeye Financials Expert Speaker Series.
Our guest this week will be Carl Hess from Towers Watson, a leading asset allocation consultant to the institutional asset management community. Carl is the global head of Towers Watson Investment Services, a leading advisor to institutional investors with over $2 trillion under advisement and $60 billion under management. He has worked with many of the world's leading institutions on their asset allocation and governance.
1.)The Great Rotation
Considering the current environment of record high stock prices and a bond market which is kicking off losses for the first time in 14 years...how is current institutional asset allocation being impacted by the performance of these major asset classes?
2.) Bond Bedlam
How is institutional asset allocation dealing with the rise in 10-Year Treasury yields? Are institutions allocating out of the asset class or are managers taking the opportunity to reinvest at higher rates?
3.) Quantitative Easing Questions
How is asset allocation being impacted by Quantitative Easing?
4.) Demographic Dynamics
What are the secular trends in asset allocation? Which asset classes will have higher percentages allocated to them in the future? Which asset classes are poised to decline?
5.) Picking Winners
Which managers are best positioned to benefit from these trends? Rates, equities, alternatives, and real estate...who has the best product suites?
For more information email
I love everything about investing except maybe the fact that I’m actually in the investment industry. If you saw how sausage was made you probably wouldn’t eat it.
The allure of a skillfully prepared valuation narrative, however, remains one of the industry’s most enticing, sirenic delicacies. The market is expensive here but valuation is (still) not a catalyst. Tops are processes, the price signal remains bullish currently and, up through the present, we have continued BTDB’ing (Buying the Damn Bubble) while taking down our gross and net equity exposure since the September 18th, No-Taper announcement.
VALUATION: BLOVIATION & CONSTERNATION
It has been hard to escape the valuation discussion the last few weeks as bubble speculation has been ubiquitous alongside higher nominal (& real) highs for domestic equities. Reviewing a cross-section of market valuation measures (below), the summary takeaway is pretty straightforward – across the balance of metrics, equities are, indeed, moving towards overvalued on a historical basis.
The problem, of course, is that the overbought-overvalued market narrative is a tired one as moderately elevated valuation has characterized most of 2013 and prices advancing at a premium to profits is not a new phenomenon – particularly in what could (amazingly still) be considered an “early cycle”, liquidity supported stage of the recovery.
VALUATION IS (STILL) NOT A CATALYST:
We use a broad range of valuation and sentiment indicators when contemplating the direction of markets and where our view sits in the context of current prices, consensus estimates, and prevailing sentiment. From an Investment decision making perspective, valuation sits somewhere near the middle-bottom of the our consideration hierarchy.
So, rather than claiming right to some specific valuation-in-isolation based insight on the immediate term direction for equities, below we survey a cross-section of canonical market valuation measures to provide some historical context for current multiples.
In terms of how we are managing the current environment: With fund flows, decent macro, rising M&A activity, bullish price momentum, near universal acknowledgement of the existent “bubbliness”, and the lack of a discrete negative catalyst all supporting equities in the immediate term, we’ll continue to ride the bull until the price signal changes. Prune & plant within our immediate term risk ranges while holding an elevated cash balance.
As Keith noted this morning: “This is a raging bull market, until it isn't.”
CAPE/Shiller PE: At 24.9, the CAPE ratio (inflation-adjusted SPX price divided by the 10Y average of inflation adjusted earnings) is moving into the top decile of its historical range. Below we’ve broken the historical CAPE ratio values into deciles and looked at average market performance over the subsequent 1Y and 3Y periods. The mapping of the Shiller PE vs subsequent market performance suggests return expectations should move systematically lower alongside incremental increases in valuation. Historically, 1Y and 3Y returns progressively decline for each decile change in the Shiller PE.
Tobins Q-Ratio: Longer-term valuation arguments center on the premise that returns on capital should equalize to cost of capital and market values should normalize to economic value. Tobin’s Q ratio is not a measure we use to tactically manage risk, but we can appreciate the intuition (why buy an asset when you can “re-create” it for less and compete away existing, excess profit) underneath its application.
Historically, at extremes, it has served as a solid lead signal for subsequent market performance. We are sitting just below the 1.0 level currently and approximately 1.0 standard deviation above the long-term mean value – a level that has generally not been a harbinger of positive forward returns historically.
S&P 500 Market Cap-to-GDP: Assuming the collective output of SPX constituents credibly reflects aggregate national production (or serves as a credible proxy for it), the Market Capitalization-to-GDP ratio effectively represents a price to sales multiple for the economy. As can be seen, on a historical basis, we are certainly entering “expensive” territory as we push towards breaching 100% to the upside.
FORWARD/TRAILING P/E: On conventional LTM & NTM P/E metrics, the market is moderately expensive at present. Valuing the market on 1Y of (recurrently over-optimistic) forward earnings estimates has its pitfalls and, additionally, any perceived cheapness in current multiples should be discounted to account for mean reversion downside off peak corporate profitability (more below).
MARKET COMPS AND PEAK MARGINS: Operating Margins remain near peak with Corporate Profitability continuing to make higher highs with after-tax corporate profits advancing to a record 11% of GDP in 2Q13 – some 85% above the long-term average at current levels . Unless you think peak returns to capital provide a sustainable path to aggregate demand growth in the face of negative trend growth in real earnings, trough returns to labor, middling productivity growth and secularly depressed investment spending, then the mean reversion risk for margins remains asymmetrically to the downside.
Topline growth estimates for the SPX (mkt weighted) don’t look unreasonable at +4.8% for 2014. Expectations look similar across SPX constituents on an equal weighted basis with median 2Y growth estimates reflecting modest acceleration over the next four quarters. However, the slope on earnings growth (+10.9% for 2014) over the NTM continues to look overly aggressive given expectations for further, significant margin expansion above already peak corporate profitability.
Christian B. Drake
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