Takeaway: Amongst market volatility, investors favored passive ETFs and cash in the 5-day period ending September 30.
Investment Company Institute Mutual Fund Data and ETF Money Flow:
As volatility picked up across asset class in the 5-day period ending September 30, most risk assets shed funds. Total equity products (mutual funds and ETFs) lost -$3.5 billion and total bond products shed -$8.1 billion. Within equity, domestic equity mutual funds finished the third quarter with a bang, losing -$7.2 billion. That was the second largest weekly outflow all quarter. Meanwhile, investors clearly favored the safety of cash, making a +$8 billion contribution to money funds. Total money funds, according to ICI, brought in +$67 billion in 3Q15, after draw downs of -$18 billion in 2Q and -$92 billion in 1Q15.
With volatility continuing to drive investors to safety and out of risk assets, the current market environment supports our Long recommendation on money fund manager Federated Investors (see FII report) and our Short recommendations on equity managers Janus Capital and T. Rowe Price (See JNS and TROW reports).
In the most recent 5-day period ending September 30th, total equity mutual funds put up net outflows of -$6.3 billion, trailing the year-to-date weekly average outflow of -$391 million and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund contributions of +$891 million and domestic stock fund withdrawals of -$7.2 billion. International equity funds have had positive flows in 46 of the last 52 weeks while domestic equity funds have had only 11 weeks of positive flows over the same time period.
Fixed income mutual funds put up net outflows of -$8.4 billion, trailing the year-to-date weekly average inflow of +$128 million and the 2014 average inflow of +$926 million. The outflow was composed of tax-free or municipal bond funds withdrawals of -$588 million and taxable bond funds withdrawals of -$7.8 billion.
Equity ETFs had net subscriptions of +$2.8 billion, outpacing the year-to-date weekly average inflow of +$1.9 billion but trailing the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net inflows of +$328 million, trailing the year-to-date weekly average inflow of +$1.1 billion 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 healthcare XLV lost -$831 million or -6% last week as the sector came under political scrutiny for drug price increases. Meanwhile, the consumer staples XLP saw the biggest percentage inflow of +7% or +$507 million for the week.
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 +$4.6 billion spread for the week (-$3.5 billion of total equity outflow net of the -$8.1 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 +$1.5 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 -$19.0 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
We will host a conference call on Today, October 8 at 2:30PM ET to update our long Macau trade call, present analysis on the September numbers, discuss our updated model projections, outlook and Q3 earnings previews, and to provide a more quantitative look at the implications of a rapidly declining junket business. As always, we will entertain questions at the end of the presentation.
RELEVANT TICKERS INCLUDE:
LVS, WYNN, MGM, MPEL, 0027.HK, 1128.HK, 1928.HK, 2282.HK, 6883.HK, and 0880.HK
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We will be hosting our highly-anticipated Quarterly Macro Themes conference call TODAY, October 8th at 1:00PM ET. Led by CEO Keith McCullough, the presentation will detail the THREE MOST IMPORTANT MACRO TRENDS we have identified for the quarter and the associated investment implications.
WATCH THE REPLAY BELOW
Q4 2015 MACRO THEMES OVERVIEW:
As always, our prepared remarks will be followed by a live, anonymous Q&A session. Please submit your questions to . Also, for those of you who cannot join us live, we will be distributing a replay video of the call shortly after it concludes.
The Hedgeye Macro Team
"Whether I’m an hour or a week early on another US equity SELL signal really doesn’t concern me," wrote Hedgeye CEO Keith McCullough in an Early Look this week. "I’m as focused as I’ve ever been in my career – focused on the research and quantitative signaling #process that has been working vs. consensus gone bad."
YUM is on the Hedgeye Restaurants Best Ideas list as a LONG.
The overall performance of Yum! Brands continues to be overshadowed by the poor results from the China segment. Yesterday, YUM released 3Q15 earnings that missed estimates on the top and bottom-line, mainly due to China. Company revenues were $3.43bn, short of consensus estimates of $3.67bn. Same-Store Sales (SSS) were strong in all segments except for China and India. China posted SSS of +2%, well short of consensus estimates of +9.6%, while India posted -18% SSS versus consensus at -6%. KFC on the other hand continued to perform well, posting +3% SSS versus estimates of +2.6%, Pizza Hut continued their flat trajectory with +1% comps versus estimates of +0.5%, and lastly, Taco Bell, put up a +4% comp against estimates of +3.9%. Even with the positive performance ex-China, YUM missed on the bottom-line, reporting Q3 FY15 EPS of $1.00 versus consensus estimates of $1.06.
THE NEW FULL YEAR GUIDANCE
With the continued pressure in the China business, management has decided to lower guidance, they now expect full year 2015 EPS growth to be in the low single-digit positive range. Versus guidance delivered during the 2Q15 call, of at least 10% EPS growth.
I asked Greg Creed at the analyst meeting last November what he wanted his legacy to be as CEO of YUM. His answer: “to return YUM to the 10% EPS growth model of the past.” While that may sound good given the track record of his predecessor, the world has changed and so should YUM. Holding onto the past is a waste of energy, and serves no purpose in creating a new future for YUM. It’s time for CEO, Greg Creed, to solidify his legacy as CEO of YUM and forge a new path for YUM that will better serve shareholders.
More to the point, YUM’s CHINA growth model has changed and will never look like it did in the past. As opposed to 5 or 10 years ago, China represents a nasty mix for YUM – a business unit that is under significant pressure and it makes up a significant part of YUM’s financial performance.
The Board must do something to evolve the business model and reduce its exposure to China in a meaningful way. The board can de-risk the business by selling off company-owned stores in China and returning the company to a GLOBAL QSR asset light model.
YUM is a great company with three great global brands. The margin structure, balance sheet and cash flow of the company are envy to many global companies. This is highlighted by the dividend raised by 12%, slightly better than what I thought they would have done. The strength of the company can also be seen in the performance of KFC and Taco Bell, both concepts posted strong results, despite potential headwinds (KFC in emerging markets and MCD slowing Taco Bells performance).
Despite these having significant number of positive attributes, the assets in China are now a liability, and the stock will trade that way until a new path forward is determined. The clear evidence of this is how the stock traded today, down roughly 17%. The message to the company is clear - shareholders want a new way forward.
Please call or e-mail with any questions.
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