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[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA

Takeaway: Active equity strategies continued to struggle in the most recent survey and the forming DOL rules won't help.

 

Editor's Note: This is a complimentary research note originally published March 24, 2016 by our Financials team. If you would like more info on how you can access our institutional research please email sales@hedgeye.com.

 

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Investment Company Institute Mutual Fund Data and ETF Money Flow:

In the 5-day period ending March 16th, three of five active equity mutual fund categories lost funds with large cap equity and emerging market funds seeing the biggest redemptions losing  -$1.3 billion and -$1.0 billion respectively. Meanwhile equity ETFs continued their market share advance during the week with +$3.5 billion in contributions. Fixed income allocations snapped back with total bond mutual funds and ETFs collecting +$7.3 billion as investors rebalanced from the 5 week long stock rally.

 

As if the active business didn't have enough challenges competing with passive ETFs to begin with, the forming Department of Labor Fiduciary rule is decidedly skewed to driving incremental growth into index products. The DOL outlines "conflicted advice" as an active mutual fund distributed by a third party (a broker dealer for example not associated with the fund family) and if those 3rd party funds underperform their benchmark then the new rule gives retail investors (in the retirement channel) the ability to pursue class action law suits against the distributors. Thus, passive ETFs or index funds stand to benefit as a way to circumvent the guidelines, as by definition they can't "underperform." Our Speaker Series call this week with Bob Litan laid out a framework for understanding this policy (see Speaker Series replay HERE). 

 


[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI1

 

In the most recent 5-day period ending March 16th, total equity mutual funds put up net outflows of -$2.1 billion, trailing the year-to-date weekly average outflow of -$302 million and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$4.9 billion, outpacing the year-to-date weekly average inflow of +$793 million and the 2015 average outflow of -$475 million.

 

Equity ETFs had net subscriptions of +$3.5 billion, outpacing the year-to-date weekly average outflow of -$2.6 billion and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$2.4 billion, outpacing the year-to-date weekly average inflow of +$2.3 billion and the 2015 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 2015 and the weekly year-to-date average for 2016:

 

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI2

 

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI3

 

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI4

 

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI5

 

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI6



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.

 

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI12

 

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI13

 

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI14

 

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI15

 

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI16



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 2015, and the weekly year-to-date average for 2016. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI7

 

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors withdrew -$411 million or -5% from the utilities XLU ETF last week.

 

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI9



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.

 

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI17

 

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$5.9 billion spread for the week (+$1.4 billion of total equity inflow net of the +$7.3 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 is -$541 million (negative numbers imply more positive money flow to bonds for the week) with a 52-week high of +$20.2 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.)

  

[UNLOCKED] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI10

 


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] Fund Flow Survey | DOL To Put Active Strategies DOA - ICI11 


CHART OF THE DAY: The Final Tally Is In! Earnings Season Sucked

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.

 

"... Shifting gears, not that profit or credit cycles matter when the Janet waives her “dovish” day-trader wand, but Earnings Season officially ended yesterday and here’s the summary:

  1. SP500 (500 of 500 companies have reported) aggregate SALES down -4.0%
  2. SP500 aggregate EPS down -6.9%
  3. SP500 Sectors saw 6 of 10 report NEGATIVE earnings growth
  4. “Ex-Energy” (i.e. 40 of the 500 companies), there are still 460 companies!
  5. Industrials (65 companies) and Financials (90) companies had EPS of -5.9% and -5.4%, respectively"

 

CHART OF THE DAY: The Final Tally Is In! Earnings Season Sucked - 03.30.16 chart


Cartoon of the Day: Whack!

Cartoon of the Day: Whack! - oil cartoon 03.29.2016

 

Oil is getting knocked around again today, down another -2.4%, despite Fed head Janet Yellen reiterating that declining crude prices are "transitory."


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BREAKING: Fed Is Still Out To Lunch (Here's How To Play It)

BREAKING: Fed Is Still Out To Lunch (Here's How To Play It) - Yellen cartoon 11.11.2015

 

BREAKING... Believing the Fed's serially optimistic economic forecasts remains the biggest risk to investors.

 

Today, Fed head Janet Yellen said "caution" about further rate hikes was "especially warranted." While she was speaking, Treasury yields continued their downward descent. 

 

Here's where we're at. The Fed continually dials back rate hike expectations and thereby jawboning Long Bond yields lower. The 10-year Treasury yield currently sits at 1.82%, 45 basis points below where it started at the beginning of the year. 

 

BREAKING: Fed Is Still Out To Lunch (Here's How To Play It) - 10yr treasury

 

Q: Who warned you?

A: Hedgeye

 

The dovish Fed commentary confirmed what we have long known. It was a mistake to raise rates in December and interest rates will have to stay #LowerForLonger to prop up an already flimsy economy. (Reminder: Wall Street's "top strategists" predicted the 10-year Treasury yield will end the year between 2.5% and 3.5%. We'll see about that.) 

 

As Hedgeye CEO Keith McCullough likes to say, it still pays to be "the most bullish guy on Wall Street" on Long Bonds (TLT). Take a look at the performance of TLT year-to-date versus the S&P 500:

 

BREAKING: Fed Is Still Out To Lunch (Here's How To Play It) - tlt v sp

 

What else has worked this year? Other Hedgeye Long calls...

 

  • Gold (GLD) up 16.6% year-to-date
  • Utilities (XLU) up 13.4% year-to-date

(*Not exactly macro market expressions of confidence in the Fed's "all is good" mantra, huh?)

 

And if you think things get easier from here for Yellen & Co. don't hold your breath. As McCullough wrote in today's Early Look:

 

"We’re reiterating that the US economic and profit cycle won’t even have a chance of putting in a rate of change (cycle) bottom until Q2 which, candidly, won’t be reported until Q3."

 

Let's set aside for a second the fact that the Atlanta Fed's own Q1 2016 GDP forecast released yesterday just plunged 200 bps in the past month to a paltry 0.6%. It's our contention that as the developing corporate profit and industrial recession gets priced into the market (aka economic data continues to roll over), long-only equity investors can expect a lot more pain from here. 

 

stick with what's been working all year.


The Airbnb Impact On Hotels & Timeshare

 

Hedgeye’s Gaming, Lodging, and Leisure team hosted a presentation recently to introduce our proprietary Airbnb listings/price tracker and discuss the Airbnb impact on the lodging and timeshare space.


Millennials: Where the Wild Things Aren't (And The Investing Implications)

Takeaway: As Millennials have come of age, young adult entertainment has softened—a trend with profound generational undercurrents.

Editor's Note: Below is a complimentary research note written by world-renowned demographer Neil Howe who recently joined Hedgeye as Demography Sector Head.

 

Millennials: Where the Wild Things Aren't (And The Investing Implications) - 12

WHAT’S HAPPENING

 

The U.S. nightlife industry is suffering. Over 10,000 bars have shut down in the past decade—with closures reaching a peak of six per day in 2014. Even big joints are going down, including four of Atlantic City’s 12 casinos last year.

 

Millennials: Where the Wild Things Aren't (And The Investing Implications) - Slide3

 

It’s not just a U.S. trend. Nightclubs in Britain fell over the last decade from 3,144 to 1,733—a 45 percent drop. In the Netherlands, the number of nightclubs and “discos” have meanwhile fallen by 38 percent.

 

Kids these days just want to live in their f---ing own little worlds in their bedrooms watching Netflix and becoming obese.” –frustrated UK bartender cited in The Economist (2015)

WHY IT’S HAPPENING

 

Young adults typically provide the top-line growth for drinking places. But today’s young adults are drinking (and smoking) less. This was a trend first noticed when the oldest Millennials were in highschool back around 2000, and the trend is aging with them as they grow older.

 

Millennials: Where the Wild Things Aren't (And The Investing Implications) - Slide6

 

When they do drink, moreover, Millennials are less likely to do so in anonymous settings with random strangers. Why?

 

(1)  Millennials use social media and smart phone to choose exactly who they want to be with. You no longer have to be with everybody in order just to meet somebody.

(2)  The demographic weight of the Boomers, as they age, is changing the social mood tone in a more sedate and conservative direction. When Boomers were young, the culture celebrated wild night life. Now it celebrates mindfulness and juice diets.

(3)  Millennials—a.k.a. “Generation Yawn”--themselves show a wide-ranging aversion to personal risk-taking of every variety, including the edgy nightclub/bar lifestyle. Assertive Millennial women may be taking the lead here: They are devaluing male-dominated hedonism, and the men are mostly going along.

BROADER IMPLICATIONS

 

In the media, Boomers (and Xers) are embracing the dysfunctional “wild child” label, even as Millennials abandon it. There is a burgeoning category of movies and TV shows centered on “Baby Boomers behaving badly.” Millennials, meanwhile, are flocking to the “new nice” in entertainment, hosted by never-nasty hosts like Jimmy Fallon and Trevor Noah.

 

Millennials: Where the Wild Things Aren't (And The Investing Implications) - Slide11

 

Sports brands are losing their bleeding edge. Nike e.g. is less into black and winning at all costs—and instead doubling down on neon and pastel and “athleisure.” Millennials who do color runs and tough mudder are not trying to beat each other. Activities associated with competition and danger (like snowboarding) are on the decline—along with bar games like pool and darts.

 

Las Vegas casinos, seeing that Millennials are not as attracted to drinking and gambling as older generations, are ramping up on sociable skill games with leaderboards. They’re also investing more in spas, restaurants, and even underground wine caves to give Millennials more spectacular and “shareable” experiences.

 

Millennials: Where the Wild Things Aren't (And The Investing Implications) - Slide9


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