ICI Fund Flows: Great Rotation Underway

Takeaway: Redemptions continued in bonds last week and equities had slight inflows. YTD the rotation is underway with bond outflows and equity inflows

This note was originally published December 12, 2013 at 08:25 in Financials

Editor's note: This unlocked research note was written by Director of Financials Jonathan Casteleyn. For more information on how you can subscribe to Hedgeye research click here.

ICI Fund Flows: Great Rotation Underway - flows

Investment Company Institute Mutual Fund Data and ETF Money Flow:


Total equity mutual fund flow for the week ending December 4th was $1.9 billion, a below average weekly inflow for stock funds this year but none-the-less a slightly positive indication. Within the total equity inflow result, domestic equity mutual funds lost $1.0 billion, the second consecutive weekly outflow in U.S. stock funds with International equity funds posting a $2.9 billion inflow, on par with last week. Total equity mutual fund trends in 2013 however now tally a $3.2 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Fixed income mutual funds continued persistent outflows during the most recent 5 day period with another $4.4 billion withdrawn from bond funds. This week's draw down improved slightly sequentially from the $4.7 billion outflow the week prior but ongoing redemptions have now forced the 2013 weekly average for all fixed income funds to a $1.2 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 inflows and fixed income ETFs seeing moderate outflows week-to-week. Passive equity products gained $207 million for the 5 day period ending December 4th with bond ETFs experiencing a $331 million outflow, an acceleration from the $251 million redemption the 5 days 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.


With year-end tallies almost complete with only 2 full work weeks left in 2013, we have compiled the annual totals from the ICI for mutual fund results and also from Bloomberg for ETF production throughout 2013. In the Hedgeye Asset Management Thought of the Week below, we outline the resurgence in stock fund inflows, the emerging outflows in bond funds, and the record years for equity ETF inflow and commodity ETF outflows.


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ICI Fund Flows: Great Rotation Underway - ICI chart 2



For the week ending December 4th, the Investment Company Institute reported slight equity inflows into mutual funds with over $1.9 billion flowing into total stock funds. The breakout between domestic and world stock funds separated to a $1.0 billion outflow into domestic stock funds and a $2.9 billion inflow into international or world stock funds. These results for the most recent 5 day period within stock funds were bifurcated, with the outflow in domestic stock funds below the weekly average of a $551 million inflow and with world stock fund production slightly above the $2.6 billion weekly inflow average. The aggregate inflow for all stock funds this year now sits at a $3.2 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 December 4th with outflows staying persistent within the asset class. The aggregate of taxable and tax-free bond funds booked a $4.4 billion outflow, a slight sequential improvement from the $4.7 billion lost in the 5 day period prior. Both categories of fixed income contributed to outflows with taxable bonds having redemptions of $3.0 billion, which joined the $1.3 billion outflow in tax-free or municipal bonds. Taxable bonds have now had outflows in 23 of the past 27 weeks and municipal bonds having had 27 consecutive weeks of outflow. While the sharp redemptions 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 $1.2 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 $894 million inflow in the most recent 5 day period, although the past 2 weeks have been below year-to-date averages. Hybrid funds have had inflow in 25 of the past 27 weeks with the 2013 weekly average inflow now at $1.5 billion, a strong advance versus the 2012 weekly average inflow of $911 million.



ICI Fund Flows: Great Rotation Underway - ICI chart 3

ICI Fund Flows: Great Rotation Underway - ICI chart 4

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ICI Fund Flows: Great Rotation Underway - ICI chart 7



Passive Products:



Exchange traded funds had mixed trends within the same 5 day period ending December 4th with equity ETFs posting a slight $207 million inflow, a drastic drop from the $11.4 billion subscription the week prior. The 2013 weekly average for stock ETFs however is still a $3.3 billion weekly inflow, nearly a 50% improvement from last year's $2.2 billion weekly average inflow.


Bond ETFs experienced a moderate outflow for the 5 day period ending December 4th, with a $331 million redemption a sequential acceleration from the week prior which produced a $251 million outflow for passive bond products. Taking in consideration this most recent data, 2013 averages for bond ETFs are flagging with just a $253 million average weekly inflow for bond ETFs, much lower than the $1.0 billion average weekly inflow for 2012.



ICI Fund Flows: Great Rotation Underway - ICI chart 8

ICI Fund Flows: Great Rotation Underway - ICI chart 9 



Hedgeye Asset Management Thought of the Week: 


Some analysts as well as media outlets are still in denial about the start of a rotation from U.S. fixed income into U.S. stocks, however the debate in our minds is a short one. With only a few weeks left in 2013, we have compiled the year-to-date flow totals from the Investment Company Institute for mutual funds and from Bloomberg for exchange traded funds. The trends from our perspective are quite clear. Within mutual funds, the $1 trillion that has come into bond funds since 2008 (or the start of the Fed's quantitative easing program) has started to unwind with the first outflow in fixed income funds within the ICI data since 2007. The fixed income outflow of $63 billion through the first 49 weeks of 2013 still pales in comparison to the $303 billion inflow that came into fixed income last year in 2012 (can you say blow off top?) and also the record year of 2009 when the Great Rotation from stocks into bonds started and $379 billion came into fixed income funds. While the over $155 billion outflow in the back half of 2013 has been the sharpest bond outflow in history (most significant 27 week ouflow sequence), the first half of 2013 experienced nearly $100 billion of inflow into fixed income to net to the fairly insignificant outflow year-to-date of $63 billion currently. Our regression model of bond performance to bond outflows continues to forecast a total outflow of $200 billion through 2014 meaning that this current rotation from bonds into equities could have quite a tail to go.


Conversely, the nascent production in stock funds (while consistently dismissed) has been historically quite impressive being double that of the $74 billion that came into equity mutual funds in 2007. While the $159 billion running inflow into stock funds thus far in 2013 has had an international fund bend ($131 billion has gone into international stock funds versus just $28 billion into domestic equity funds), there is still ample reason to think that U.S. stocks can continue this turn in redemptions that has plagued them for all 6 years of ICI data before '13 (still record amount of cash on U.S. corporate balance sheets, generally low yields can allow stocks higher multiples, and the unwinding of the commodity super cycle and U.S. bond fund outflows needing to be invested somewhere). Bloomberg's annual tally of ETF information has equally interesting thematic value with the strong mutual fund trends in equities being validated on the stock ETF side, with another record year for ETF inflow (equity ETFs for 2013 have netted $173 billion in '13, higher than the $117 billion in '12 and a new record from the prior high of $127 billion in 2008). Fixed income interest in ETFs is matching its mutual fund brethren as well with passive bond products taking in a paltry $11.3 billion in 2013, a drastic drop from the record $56.4 billion last year (even the new fast growing ETF vehicle is not summoning up new interest from investors with the potential multi-year down cycle in fixed income). Commodity ETFs have had a year to forget with the formerly exuberrant gold market having been knocked down for a 20% plus loss and incrementally higher U.S. interest rates broadly supporting a higher dollar which has sent overall commodity indices lower. Commodity specific ETFs have had a record $25.1 billion redemption this year, the first negative year since the start of our data set in 2007, and a far cry from the formerly worst year of just a $600 million inflow in 2011.


We don't estimate that a substantial change from these current trends will occur until mid 2014 (these current themes are intact with forthcoming Fed tapering to continue to hurt the demand for fixed income and that U.S. stocks can at least have a positive start to 2014). Thus our favorite long idea remains T Rowe Price (TROW), a manager with industry leading equity performance to hoover up new industry equity flows and also a strong balance sheet to seed new products and also continue its streak of 26 consecutive years of dividend increases.



ICI Fund Flows: Great Rotation Underway - ICI chart 10

ICI Fund Flows: Great Rotation Underway - ICI chart 11



Jonathan Casteleyn, CFA, CMT 



Joshua Steiner, CFA


[VIDEO] Keith's Macro Notebook 12/16: Japan, Germany, Euro

European Banking Monitor: Quiet Heading Into The New Year

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .




European Financial CDS - European banks resumed their winning ways last week, posting another sharp improvement. Spanish and Italian bank swaps led the charge lower. On a month-over-month basis, the average EU bank is trading 17 bps tighter (9%) tighter.


European Banking Monitor: Quiet Heading Into The New Year - z. banks


Sovereign CDS – Sovereign swaps were tighter throughout much of Europe last week. Italy and Spain saw sovereign swaps tighten 17 and 15 bps, respectively. Elsewhere in the world, swaps were little changed.


European Banking Monitor: Quiet Heading Into The New Year - z. sov 1


European Banking Monitor: Quiet Heading Into The New Year - z. sov2


European Banking Monitor: Quiet Heading Into The New Year - z. sov3


Euribor-OIS Spread – The Euribor-OIS spread widened by 1 basis point to 10 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 


European Banking Monitor: Quiet Heading Into The New Year - z. euribor


Matthew Hedrick


Early Look

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Macau gaming revenues were much better in the 2nd week of December than the first.  Daily table revs averaged HK$1,033 million, up 33% over the comparable period last year, and 9% better than the 1st 9 days of this December.  We believe both volumes and hold percentage contributed to the strength.  We had already accounted for the improving results, thus our full month GGR forecast remains unchanged at YoY growth of +10-16%.


As expected, market shares have normalized from week 1 although LVS now shows the biggest delta over recent trend.  Wynn and MGM are also above trend thus far in December.  WYNN and LVS remain our favorite Macau stocks.





What's New Today in Retail (12/16)

Takeaway: Ullman named Chair of Dallas Fed Board. Sign of limited term at JCP? H&M crushes – everyone. AMZN goes after COST Sam’s. ADDDY M DEST BRBY



ADS, SPD - Mike Ashley could buy 5% stake in Adidas after it stopped Sports Direct from selling Chelsea kit



  • "Mike Ashley, billionaire founder of Sports Direct, could buy a 5 per cent stake in Adidas in retaliation for the sportswear manufacturer’s decision not to provide his stores with replica Chelsea Football Club kits next season, according to a report."
  • "Sales of Chelsea products are worth up to £10million a year to Sports Direct so Adidas’s move prompted a sharp fall in the share price."


Takeaway: The list of people and companies Mike Ashley has crossed in his storied career is very long. He traditionally goes for the jugular -- even when it's not necessary.  Not a guy you want to be a major shareholder of your company, Adidas.


HMB - Sales development in November 2013 and Fourth Quarter 2013



  • "The H&M Group total sales including VAT increased by 21 percent in local currencies in November. Sales in comparable units increased by 10 percent. The strong sales development in November has been positively affected by calendar effects of approximately 3 per cent and by favourable weather."
  • "In the fourth quarter of 2013, i.e. 1 September to 30 November, sales including VAT increased by 13 percent in local currencies compared to the corresponding quarter last year. Sales in comparable units increased by 3 percent in the fourth quarter."


Takeaway: Weather or no weather, the reality is that H&M is annihilating almost every other apparel retailer in the world. We wonder if Lululemon cares that H&M is coming out with a Yoga line?


M, DEST - Destination Maternity's Exclusive Deal with Macy's



  • "Destination Maternity Corp. will become the exclusive provider of maternity and nursing apparel for, beginning late January."
  • "Destination Maternity operates leased departments in over 600 Macy’s locations, which typically carry a combination of Motherhood Maternity, A Pea in the Pod, A Pea in the Pod Collection and Jessica Simpson Maternity branded merchandise."


Takeaway: This is much more of a  win for DEST than for M. Will this make more pregnant women shop at Macy's? Probably not, The reality is that there will be a better selection at DEST's own web site. But for the women shopping Macy's anyway, and are looking for maternity clothes, on the margin it will obviously benefit DEST.  What we don't know is the extent to which Macy's will stipulate that DEST has to change/minimize the offering on its own site in order to win this deal.


JCP - Mike Ullman Named Chairman of Dallas Federal Reserve Bank



  • "The Federal Reserve Board on Friday designated the chairs at the 12 Federal Reserve Banks for 2014. Myron E. 'Mike' Ullman 3rd, who is chief executive officer of J.C. Penney Co. Inc., was named chairman of the Dallas Federal Reserve Bank."
  • "Ullman was appointed to the Dallas Fed Board in 2008, and was deputy chairman in 2011."


Takeaway: Huh? This one is a head scratcher. Apparently the Federal Reserve Board does not care much about a) the stock price of the company for an executive that gets such a prestigious appointment, or b) the fact that the person has a 100 hr/week job and can't (or shouldn't) offer up the time that this appointment arguably needs. One interesting point is that perhaps Ullman wouldn't have accepted this appointment if he planned on being at JCP for too much longer.


AMZN - Amazon said to launch Pantry to take on Costco, Sam's



  • is working on a new business called Pantry that will help it expand further into the giant consumer package goods market and take on warehouse club stores Costco and Wal-Mart's Sam's Club, according to three people familiar with the effort. currently set to launch in 2014, the people said on condition of anonymity. They did not want to be identified because Amazon's plans are still private."
  • "The service will be targeted at existing members of Amazon's Prime shipping program. It will launch with about 2,000 products typically found in the center of grocery stores, such as cleaning supplies, kitchen paper rolls, canned goods like pet food, dry grocery items like cereal and some beverages."
  • "Amazon will let Prime shoppers put as many of these items into a set sized box, up to a specific weight limit. If the products fit and they don't exceed the maximum weight, Amazon will ship the box for a small fee."


Takeaway: This was a form of retail destruction waiting to happen. We have no doubt that AMZN will succeed in this realm -- our only question is whether it can do so profitably. If you think about it, the model is very similar to Costco. Pay an up front membership fee (in AMZN's case, it's Prime) for the right to buy goods just a few margins points above cost.  Our only concern is how long AMZN will be comfortable operating at a loss while it establishes a foothold. Our bet is anywhere between 3-5 years (about the time when they plan to have drones delivering their packages -- yes, it's still painful to write that).


AMZN - Amazon Doubles Ecommerce Webstore Fees Next Year



  • "...Amazon is significantly raising the cost of operating a Webstore next year, perhaps a sign that the company is more confident of the offering."
  • "The monthly fee will double for all merchants, and those using Amazon Webstore who also sell products through the Sell on Amazon program will pay double the current transaction fee as well, bringing it in line with Webstore-only merchant transaction fees."
  • "The new fees go into effect on February 4, 2014."


Takeaway: The merchants using Webstore have literally no recourse here. What are they going to do -- change up their outbound logistics and find a partner that might be as efficient as AMZN?  Their only hope is if Alibaba gets aggressive in wanting to steal away the business. Alibaba is much better at branding than it's US competitor. But unfortunately, it still lacks the consumer penetration.


FOSL, SHLD - NASDAQ OMX Group, Inc. : Annual Changes to the NASDAQ-100 Index



  • "As a result of the re-ranking, the following five securities will be removed from the Index: Fossil Group, Inc. (Nasdaq:FOSL), Microchip Technology Incorporated (Nasdaq:MCHP), Nuance Communications, Inc. (Nasdaq:NUAN), Sears Holdings Corporation (Nasdaq:SHLD) and DENTSPLY International Inc. (Nasdaq:XRAY)."


Takeaway: Anyone surprised?


BRBY - Burberry Unveils Beauty Box Concept



  • "Burberry Beauty Box, a new retail concept that sells the brand’s makeup, fragrance and accessories, has landed in Covent Garden here."
  • "The company plans to roll out Beauty Box to more locations. It is the first retail concept to launch after Burberry took its beauty business in-house, acquiring its license rights back from Inter Parfums SA at the end of 2012."


What's New Today in Retail (12/16) - chart1 12 16


Takeaway: Definitely one to watch. Whenever Burberry does anything new we take notice. The only knock on the concept is that consumers in this space want variety in brands as well as products. That's why the cosmetics counters at department stores are often the most profitable parts of the store. We question whether Burberry can scale this concept profitably as it it intends.


AMZN, WMT, AAPL - Amazon is top US retailer on Pinterest this Christmas shopping season



  • " is the most popular US online retail site when it comes to having web content shared on Pinterest, the pin-board style social network, in the run up to Christmas 2013. In a study of ten top US retail sites[1], images and pages from are being shared most frequently on Pinterest, with Walmart and Apple taking second and third positions respectively."
  • "Content from currently generates the highest average number of pins (shares) per week[2] (16,360) on Pinterest, followed by (5,778) with (3,871) taking third place. The findings come from a study by digital marketing software and services specialist, Searchmetrics."
  1., 16,360 pins per week, 1,740,314 total pins, 5,637 followers
  2., 5,778 pins per week, 529,992 total pins, 33,337 followers
  3., 3,871 pins per week, 1,111,959 total pins, 1,597 followers
  4., 325 pins per week, 54,935 total pins, 42,683 followers
  5., 307 pins per week, 17,252 total pins, 2,025 followers
  6., 281 pins per week, 60,630 total pins, 4,047 followers
  7., 202 pins per week, 7,802 total pins, 445 followers
  8., 29 pins per week, 1,511 total pins, 190 followers
  9., 27 pins per week, 2,635 total pins, 1,994 followers
  10., 9 pins per week, 2,715 total pins, 1,160 followers


CA - Carrefour to Create Shopping Mall Group



  • "Carrefour said it had signed a memorandum of understanding with real estate investment firm Klépierre to buy 127 shopping malls in France, Spain and Italy for a total of 2 billion euros, or $2.7 billion at current exchange."
  • "The world’s second-largest retailer behind Wal-Mart Stores Inc. said it planned to create a company that will encompass a total of 172 shopping malls adjoining its hypermarkets in Europe."




Visa, MasterCard $5.7 Billion Swipe Fee Accord Approved



  • Visa Inc. and MasterCard Inc. won approval for a $5.7 billion settlement that ended years of litigation with U.S. merchants over allegations that credit-card swipe fees are improperly fixed.
  • "Dozens of large retailers, including Wal-Mart Stores Inc., Inc. and Target Corp., as well as major airlines, health insurers and other consumer businesses criticized the deal. Some said the amount should have been higher and that a legal release preventing future lawsuits was written too broadly."
  • "Shortly after Gleeson issued his order, retailers and trade associations that opposed the deal including Wal-Mart,, 7-Eleven Inc., Barnes & Noble Inc. filed notices that they will appeal the decision."


British high street footfall drops 3.4% before Christmas retail rush



  • "Britain's high streets have suffered their biggest drop in shopper numbers for more than a year, according to a report that indicates a slow start to the festive retail season."
  • "The British Retail Consortium's latest numbers also showed a drop in footfall for out-of-town shops and for shopping centres, echoing sales data that has pointed to a tentative mood among Christmas shoppers."
  • "The BRC's figures, supplied by Springboard, revealed a 3.4% annual drop in footfall for high streets from September to November, the sharpest fall since August 2012."
  • "For November alone, footfall was down 2.9% on a year ago across all shop types. This matched October's drop and was largely caused by a 4.2% fall in high-street shoppers."


German PMIs Strong!

This morning we received preliminary December Manufacturing and Services PMIs for Germany, France, and the Eurozone aggregate. The data showed broad improvement in Germany (services slightly lighter) and the Eurozone month-over-month, while France declined, which is in-line with our Q4 macro themes #EuroBulls and #GrowthAccelerating in the UK and Germany:

  • Germany PMI Manufacturing 54.2 DEC Prelim (exp. 53) vs 52.7 NOV
  • Germany PMI Services 54 DEC Prelim (exp. 55.3) vs 55.7 NOV
  • France PMI Manufacturing 47.1 DEC Prelim (exp. 49) vs 48.4 NOV
  • France PMI Services 47.4 DEC Prelim (exp. 48.7) vs 48 NOV
  • Eurozone PMI Manufacturing 52.7 DEC Prelim (exp. 51.9) vs 51.6 NOV
  • Eurozone PMI Services 51 DEC Prelim (exp. 51.5) vs 51.2 NOV
  • Eurozone PMI Composite 52.1 DEC Prelim (exp 51.9) vs 51.7 NOV

German PMIs Strong! - a. pmi



For more on our global macro outlook, please see my colleague Darius Dale’s recent note “#GrowthSlowing (Lots of Charts)”.


Domestically in Germany, over the weekend there were further coalition agreements between the center-left Social Democrats and Merkel's conservative party, including key appointments. Merkel could be official confirmed as Chancellor as soon as tomorrow, nearly three months after the election.

  • Wolfgang Schaeuble will maintain his post as Finance Minister (expected)
  • Ursula von der Leyen named Defense Minister – formerly the Labor Minister. We think Merkel may be tapping her as the CDU’s next Chancellor candidate with this appointment
  • SPD Chairman Sigmar Gabriel head of newly configured Economy Ministry

DAX Levels

  • We continue to like German equities via the etf EWG. The DAX held our quantitative intermediate term TREND line of support at 8,876 last week. We’ll be watching for evidence of strength (and a buying opportunity) via an improving positive correlation between the EUR/USD and the DAX.

German PMIs Strong! - eur usd



EUR/USD Levels

  • Trading above its quantitative TRADE, TREND, and TAIL levels = Bullish breakout. etf (FXE)
  • Supported by Fed’s expectation to push out taper = Dollar bearish
  • Supported by positive data from Eurozone (for more see a recent note “Just Charts - #EuroBulls”)

German PMIs Strong! - a. Eur Levels


Matthew Hedrick

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