Takeaway: Outflows from domestic equity and fixed income continue while international equity funds continue their best year post-2007.
Investment Company Institute Mutual Fund Data and ETF Money Flow:
Investors continued recent trends last week with domestic equity and fixed income funds in redemption while international equity funds continued to win new funds at a record pace. Domestic equity mutual funds have now experienced net outflows for 24 consecutive weeks now totaling over -$93.0 billion, including the most recent week which racked up another -$2.3 billion loss. Total fixed income mutual funds and ETFs have been in outflow for 8 of the last 10 weeks, including three consecutive weeks of losses. Total fixed income products gave up -$3.7 billion in the most recent 5 day period as consternation about the direction of short term interest rates continues. Conversely, international equity mutual funds are having their best year on record, post-2007. The asset class has experienced inflows in every week so for in 2015 winning +$95.0 billion in new funds year-to-date, including the most recent week of +$3.8 billion in contributions.
Of these trends, we see growing domestic redemptions as the most actionable and continue to recommend shorting T. Rowe Price (TROW) stock with over 60% of its assets-under-management (AUM) in mutual funds and 85% of its AUM in domestic products (see our TROW report HERE).
In the most recent 5-day period ending August 12th, total equity mutual funds put up net inflows of +$1.5 billion, outpacing the year-to-date weekly average inflow of +$83 million and the 2014 average inflow of +$620 million. The inflow was composed of international stock fund contributions of +$3.8 billion and domestic stock fund withdrawals of -$2.3 billion. International equity funds have had positive flows in 48 of the last 52 weeks while domestic equity funds have had only 10 weeks of positive flows over the same time period.
Fixed income mutual funds put up net outflows of -$2.7 billion, trailing the year-to-date weekly average inflow of +$1.3 billion and the 2014 average inflow of +$926 million. The outflow was composed of tax-free or municipal bond funds withdrawals of -$10 million and taxable bond funds withdrawals of -$2.7 billion.
Equity ETFs had net subscriptions of +$2.1 billion, trailing the year-to-date weekly average inflow of +$2.3 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net outflows of -$1.0 billion, trailing the year-to-date weekly average inflow of +$809 million and the 2014 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 year-to-date average for 2015:
Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.
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 year-to-date average for 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:
Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, the utilities XLU ETF experienced the largest percentage outflow for the week. The fund lost -6% of its assets or -$375 million to redemptions.
Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.
The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$7.3 billion spread for the week (+$3.6 billion of total equity inflow net of the -$3.7 billion outflow from fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$2.1 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 -$18.1 billion (negative numbers imply more positive money flow to bonds for the week.)
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:
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
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Takeaway: We liked this TGT print a lot. But on the flip side, it’s ‘game time’ as it relates to TGT growing its business organically.
Conclusion: We liked this TGT print a lot, and thought that Cornell & Co had the most cohesive and convincing presentation we’ve heard from any Target Management team since Steinhafel’s regime was actually executing nearly a decade ago. We’ve been short Target since last year, and it’s been flat-out painful (ie we’ve been wrong) – particularly given that we’ve been mostly right on the fundamentals. On the margin, we definitely feel more comfortable with the management team and new changes in the C-Suite. We also like how expenses are tracking, as TGT is keeping costs low while they’re starting to balloon at other retailers (check out TJX’s 800bp ramp in SG&A growth over 3 quarters). But on the flip side, it’s ‘game time’ as it relates to TGT being at a point where it needs to grow its business organically. That’s an area where we can’t give the company a free pass. We’re going to hang onto our short position for now, and will wait to see how the consensus comes in after the print. There’s a lot of moving parts this quarter. If estimates look doable, then we’re out. We’ll be back in the coming days.
What We Liked:
- The headline 10% beat and accelerating comps at the store and consolidated level on a 1 and 2yr basis is a good setup for TGT in 2H. But, and this isn’t new news, we have to see an acceleration in the underlying comp from 1.2% to 2.7% in the 4th quarter to meet current expectations. TGT has some Gross Margin dollars to work with which would help if it needs to tap the promotional well, yet this isn’t about 1Q of tough comps it’s about continuing to deliver sales results on an organic basis now that the brunt of the data breach is in the rearview.
- TGT bought back $675mm in stock during the quarter and is ahead of the $2bil pace management guided to for the year. This is the first quarter in the past 6 where the company retired shares and there is a $1.2bil in cash that will be added to the balance sheet at the close of this year from the announced CVS transaction that will give TGT more flexibility when it comes to financial engineering (it could buy back 2.3% of shares outstanding at $80).
- SG&A made up the majority of the beat as it was only up 0.3% vs last year. One major item was incentive comp, which was (deservedly) up $70mm from last year, SG&A was down 1.6%. There was about $50mm in marketing spend that was ‘pushed’ into 3Q – though we’re not sure that wasn’t just a way to keep estimates lower. Nonetheless, the SG&A control when we’re seeing such major pressure at players like WMT and TJX is commendable.
What We Disliked:
- E-commerce decelerated materially from the 37% number posted in 1Q to 30% and was 1000bps below the company’s multi-year growth targets of 40%. The 3% annual sales growth guidance is predicated on +1% store comps AND 40% DTC growth. We have a hard time getting comfortable with that especially in the context of what we’ve seen across the mid-tier space. At that level of growth we think it’s safe to assume some cannibalization. TGT will need to prove that it can accelerate the pace of its e-comm channels as comps continue get tougher and the base gets bigger.
- What stands out to us after both the TGT and WMT print is how dependent both models are on the revenue line. When all is said and done for the year at a 2% comp to get to the top end of guidance we need to assume that...
- Gross margin comes in at 29.7% above the long term target of 29.5%
- SG&A straddles the long term range of 19.5% to 20% at 19.8%
- EBITDA margins hit 9.9% -- 10bps of the top end of the long term guidance range.
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