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Takeaway: Moving into the seasonally weakest part of the year, U.S. equity fund flows continue to create a slippery slope

Investment Company Institute Mutual Fund Data and ETF Money Flow:

In the most recent 5 day period ending September 17th, U.S. equity fund flow continued dire intermediate term trends with another $1.9 billion redeemed by investors. This now makes 20 of 21 weeks of outflow heading into the seasonally soft 4th quarter which could exacerbate the ongoing trend. Our research shows that despite these already substantial losses in the U.S. equity fund category over the past 5 months which total over $50 billion, that the average draw down in U.S. stock funds since 2007 has averaged 42 weeks with over $115 billion lost, so trends could continue on their downward slope. We continue to be cautious on shares of T Rowe Price (TROW) and Janus Capital (JNS) as we round out the rest of the year. 

ICI Fund Flow Survey - Slippery Slope for U.S. Stock Funds - Drawdown table

Hedgeye Best Ideas TROW Research 

Total equity mutual funds had slight inflow in the most recent 5 day period ending September 17th with a $157 million subscription into all stock funds as reported by the Investment Company Institute. The composition of flow trends continued to be weighted towards International stock funds with a $2.1 billion inflow buffering another meaningful outflow of $1.9 billion in U.S. stock funds. The inflow in International funds makes it a perfect 37 for 37, i.e. inflows in all 37 weeks of 2014. Conversely however, domestic trends continue to be very soft with now 20 of 21 weeks of outflow now totaling over $50 billion lost. The running year-to-date weekly average for all equity fund flow continues to decline and now settles at a $1.3 billion inflow, now well below the $3.0 billion weekly average inflow from 2013. 

Fixed income mutual fund flow had a hiccup in the most recent ICI data booking a modest outflow with the culprit being taxable bonds. Taxable fixed income put up its first outflow in a month and a half with a $1.2 billion redemption. Intermediate term trends are still quite positive however for taxable fixed income with 30 of the past 32 weeks having had positive subscriptions. Municipal or tax-free bond funds in the most recent survey put up a $517 million inflow, making it 35 of 36 weeks with positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $1.9 billion weekly inflow, an improvement from 2013's weekly average outflow of $1.5 billion, but still a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow). 

ETF results were mixed during the week with substantial inflows into equity funds but redemptions in passive fixed income products. Equity ETFs put up a $10.1 billion subscription, the biggest inflow in 3 months, while fixed income ETFs suffered a $1.8 billion outflow, also the most meaningful redemption in 12 weeks. The 2014 weekly averages are now a $1.9 billion weekly inflow for equity ETFs and a $788 million weekly inflow for fixed income ETFs. 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $12.9 billion spread for the week ($10.3 billion of total equity inflow versus the $2.6 billion outflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $3.9 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). The 52 week moving average chart displays the declining demand for all equity products (funds and ETFs) for the safety and security of fixed income. 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   

ICI Fund Flow Survey - Slippery Slope for U.S. Stock Funds - ICI chart1

Most Recent 12 Week Flow in Millions by Mutual Fund Product:

ICI Fund Flow Survey - Slippery Slope for U.S. Stock Funds - ICI chart2

ICI Fund Flow Survey - Slippery Slope for U.S. Stock Funds - ICI chart3

ICI Fund Flow Survey - Slippery Slope for U.S. Stock Funds - ICI chart4

ICI Fund Flow Survey - Slippery Slope for U.S. Stock Funds - ICI chart7

ICI Fund Flow Survey - Slippery Slope for U.S. Stock Funds - ICI chart8

Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:

ICI Fund Flow Survey - Slippery Slope for U.S. Stock Funds - ICI chart9

ICI Fund Flow Survey - Slippery Slope for U.S. Stock Funds - ICI chart10

Net Results:

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $12.9 billion spread for the week ($10.3 billion of total equity inflow versus the $2.6 billion outflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $3.9 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). The 52 week moving average chart displays the declining demand for all equity products (funds and ETFs) for the safety and security of fixed income. 

ICI Fund Flow Survey - Slippery Slope for U.S. Stock Funds - ICI chart11 

Jonathan Casteleyn, CFA, CMT 

 

 

Joshua Steiner, CFA