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Takeaway: As the Fed pushes the first rate hike back and Greece buys more time, fund flows have become incrementally more aggressive.

This unlocked research note was originally published March 05, 2015 at 09:36 by Hedgeye's Financials sector team led by Josh Steiner and Jonathan Casteleyn. For more information on our services click here.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

With the S&P 500 up over 5.0% in February alone, investors are chasing that performance with above average equity trends. In the most recent five day period ending February 25th, total stock products outpaced total fixed income for the second consecutive week. Stocks (both funds and ETFs) took in +$5.0 billion versus total bond products with a +$3.8 billion weekly take, representing another +$1.2 billion incremental weekly total for equities. Our research shows that this performance chasing phenomenon is most commonly displayed when year-over-year equity averages are positive which pulls along the 6 month moving average for global equity fund flows. Thus as long as equity markets stay positive on a year-over-year comp basis (which stays easy until June), equity flows should remain stubbornly high.  

*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI signature

Last week's slightly higher appetite for stocks followed three events that decreased risk perception in the market: (1) the Federal Reserve on February 18th releasing its January minutes in which it continued to indicate that it would be patient in raising rates, (2) Eurozone finance ministers on February 20th agreeing on a four-month bailout extension for Greece, and (3) Janet Yellen's February 24-25 testimony in which she emphasized that even once the Fed removes "patience" from its verbiage a rate increase will not be immediate.

*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 1

In the most recent 5 day period, ending February 25th, total equity mutual funds put up net inflows of +$2.4 billion according to the Investment Company Institute, outpacing the year-to-date weekly average inflow of +$1.7 billion and the 2014 average inflow of +$620 million. The inflow was composed of international stock fund contributions of +$2.4 billion and domestic stock fund contributions of +$72 million.  International equity funds have had positive flows in 48 of the last 52 weeks while domestic equity funds have had only 16 weeks of positive flows over the same time period. We continue to flag caution in shares of Janus Capital (JNS) despite a slightly improved equity category because of the domestic bend to the JNS product suite (with domestic ICI trends still soft) and also that the Bill Gross fund raising and performance trends continue to be lackluster (see our latest research here)

Fixed income mutual funds put up inflows of +$2.9 billion, lagging their year-to-date weekly average inflow of +$3.0 billion but outpacing their 2014 average inflow of +$929 million. The inflow was composed of +$1.9 billion of contributions to taxable funds and +$1.0 billion of contributions to tax-free or municipal bond funds.  Munis have had a solid run with subscriptions in 51 of the last 52 weeks.

Equity ETFs gained +$2.6 billion in contributions, outpacing the year-to-date weekly average outflow of -$787 million and the 2014 weekly average inflow of +$3.2 billion. Fixed income ETFs took in +$927 million, trailing the year-to-date weekly average inflow of +$2.6 billion and the 2014 weekly average inflow of +$1.0 billion.

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.   

Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2014 and the weekly quarter-to-date average for 1Q 2015:

*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 2

*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 3

*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 4

*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 5

*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 6

Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2014, and the weekly quarter-to-date average for 1Q 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 7 2

*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 8

Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR call-outs, investors used defensive funds such as the utilities XLU and long treasury TLT as sources of funds, withdrawing -3% (-$249 million) and -3% (-$259 million) respectively.

*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 9

Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$1.2 billion spread for the week (+$5.0 billion of total equity inflow net of the +$3.8 billion inflow to 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 +$1.3 billion (more positive money flow to equities), with a 52 week high of +$27.9 billion (more positive money flow to equities) and a 52 week low of -$15.5 billion (negative numbers imply more positive money flow to bonds for the week). 

*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 10

Exposures: The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

 

*UNLOCKED RESEARCH* ICI Fund Flow Survey: Performance Chasing - ICI 11 

Jonathan Casteleyn, CFA, CMT 

203-562-6500 

jcasteleyn@hedgeye.com 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com