prev

[UNLOCKED] Fund Flow Survey | Passive Crushes Active (Again)

Takeaway: Last week, equity ETFs had their largest inflow of 2016 while domestic equity mutual funds had their largest outflow.

Editor's Note: Below is a complimentary research note originally published July 21, 2016 by our Financials team. If you would like more info on how you can access our institutional research please email sales@hedgeye.com.

 

*  *  *  *

 

Investment Company Institute Mutual Fund Data and ETF Money Flow:

The ongoing shift from the expensive, less liquid, and taxably inefficient mutual fund structure was most evident as although U.S. stocks rose in the 5-day period ending July 13th, investors put through the biggest redemption of 2016 in U.S. active equity mutual funds redeeming-$7.3 billion. International equity mutual funds were also losers giving up -$769 million in the period. Meanwhile, the reallocation to passive products continued with equity ETFs winning their largest inflow of the year with +$15.7 billion in new money last week ($8.4 billion of which went into the broad market SPY).

 

In light of these trends, we maintain our short call on T. Rowe Price, which has the highest percentage of large-cap strategies of the public asset managers (the main category which is moving to passive). We estimate TROW continues to overearn in the current bull market in equities but with a stubbornly high cost structure, operating margins have peaked and are now compressing. We are also cautious near-term for the company's earning's print next Tuesday the 26th.

 

[UNLOCKED] Fund Flow Survey | Passive Crushes Active (Again) - chart1 large 7 27 16

 

[UNLOCKED] Fund Flow Survey | Passive Crushes Active (Again) - chart2

 

In fixed income, almost all categories experienced inflows last week. Total bond mutual fund flows were +$6.1 billion, and fixed income ETFs took in +$4.7 billion. Only global bond mutual funds lost a small -$8 million. Additionally, investors defensively shored up +$19 billion in money market funds.


[UNLOCKED] Fund Flow Survey | Passive Crushes Active (Again) - ICI1

 

In the most recent 5-day period ending July 13th, total equity mutual funds put up net outflows of -$8.1 billion, trailing the year-to-date weekly average outflow of -$3.0 billion and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$6.1 billion, outpacing the year-to-date weekly average inflow of +$2.4 billion and the 2015 average outflow of -$475 million.

 

Equity ETFs had net subscriptions of +$15.7 billion, outpacing the year-to-date weekly average outflow of -$420 million and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$4.7 billion, outpacing the year-to-date weekly average inflow of +$1.9 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 | Passive Crushes Active (Again) - ICI2 2

 

[UNLOCKED] Fund Flow Survey | Passive Crushes Active (Again) - ICI3

 

[UNLOCKED] Fund Flow Survey | Passive Crushes Active (Again) - ICI4

 

[UNLOCKED] Fund Flow Survey | Passive Crushes Active (Again) - ICI5

 

[UNLOCKED] Fund Flow Survey | Passive Crushes Active (Again) - 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 | Passive Crushes Active (Again) - ICI12

 

[UNLOCKED] Fund Flow Survey | Passive Crushes Active (Again) - ICI13

 

[UNLOCKED] Fund Flow Survey | Passive Crushes Active (Again) - ICI14

 

[UNLOCKED] Fund Flow Survey | Passive Crushes Active (Again) - ICI15


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 | Passive Crushes Active (Again) - ICI7

 

[UNLOCKED] Fund Flow Survey | Passive Crushes Active (Again) - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors contributed +$8.4 billion or +4% to the broad market SPY while withdrawing -$500 million or -6% from the utilities XLU.

 

[UNLOCKED] Fund Flow Survey | Passive Crushes Active (Again) - 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 | Passive Crushes Active (Again) - ICI17

 

[UNLOCKED] Fund Flow Survey | Passive Crushes Active (Again) - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$3.2 billion spread for the week (+$7.6 billion of total equity inflow net of the +$10.8 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 is -$3.4 billion (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 | Passive Crushes Active (Again) - 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 | Passive Crushes Active (Again) - ICI11


What To Expect Ahead Of The BOJ's Policy Announcement

Takeaway: Wall Street analysts overwhelmingly expect the BOJ to ease monetary policy. But does whatever the BOJ decides to do even matter?

What To Expect Ahead Of The BOJ's Policy Announcement - Kuroda cartoon 02.18.2015

 

Japan's Nikkei soared today, up +1.7%, as the country's Prime Minister Shinzo Abe announced a shockingly large fiscal stimulus package. Adding to all the shenanigans, helicopter money speculation reignited as the Wall Street Journal cited "people familiar with the matter" who said Japan was considering issuing 50-year bonds.

 

"... Every morning I wake up to a new headline about the next “yuuuge” fiscal stimulus package in Japan," Hedgeye Senior Macro analyst Darius Dale wrote in today's Early Look. "In a few short weeks, market expectations for the size of the post-election supplementary budget have nearly tripled from an anticipated ¥10T ($95B) to ¥28T ($260B)."

 

Meanwhile, the BoJ heads into its July 28-29 meeting with peak expectations of incremental monetary easing (22 of 28 analysts according to the latest Nikkei survey expect easing).

 

Some of that easing is already being priced-into Japanese equity and currency markets. The month-over-month performance numbers are as follows:

  • Nikkei: +8.9%
  • Yen (USDJPY): +3.7%

 

As we noted in today's Chart of the Day, "if you thought Japan's two lost decades were bad, just wait until the next ten year of what we'll affectionately term 'plunging into the abyss' happens." Japan's core consumption cohort, the 35-54 year old popultion, will decline over the next ten years. To which we ask:

 

Does whatever the BOJ decides to do even matter?

 

Bottom Line: If the policy board sticks with traditional QQE expansion, we would expect a short-lived JPY sell-off and Nikkei pop, but if the #BeliefSystem (that policymakers can prevent economic reality from occuring) in Japan was still intact then 10Y JGB Yields wouldn’t have come in by -9bps with 5Y5Y Forward Breakeven Rates declining -17bps MoM, according to our Macro team.

 

What To Expect Ahead Of The BOJ's Policy Announcement - jgb mom 7 27

 

What To Expect Ahead Of The BOJ's Policy Announcement - 5y5y forward japan 7 27

 

The #BeliefSystem is breaking down.


There May Be No Bottom In Sight For Twitter

Takeaway: There isn't any clear way to fix TWTR's model. There might not be any bottom in sight outside potential take-out value.

This is a brief excerpt from our Internet & Media analyst Hesham Shaaban's note to institutional subscribers on Twitter's (TWTR) lousy earnings report which has sent shares down over -10%. He’s been bearish on TWTR and remains so. Send an email to sales@hedgeye.com for more information on our institutional research.

 

...We’re lucky TWTR isn’t down near LNKD-4Q15 levels off this print, especially considering TWTR's +30% rally since the LNKD-MSFT deal.  So we may get another shot at the short, which we had covered prematurely thinking TWTR may have bottomed out.  But considering that there isn't any clear way to fix TWTR's model, it may just mean there isn't a bottom in sight outside potential take-out value, which we doubt would be anywhere near its $10B EV when both its revenues and users are trending toward decline.  

 

2-minute clip ahead of TWTR's print where Hesham outlines his concerns.

 

Where's the bottom for shares of Twitter? Anyone's guess.

 There May Be No Bottom In Sight For Twitter - Twitter cartoon 5.7.2014


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Ouch! Durable Goods: Neither Durable Nor Good

Takeaway: Headline Durable Goods fell -4.6% sequentially in June and declined to -6.4% YoY.

Ouch! Durable Goods: Neither Durable Nor Good - The Cycle cartoon 05.12.2016

 

While aggregate household spending remains relatively healthy, the trend in domestic durable goods orders continues to prove neither durable nor good, according to Hedgeye U.S. Macro analyst Christian Drake.  Headline Durable Goods fell -4.6% sequentially in June and declined to -6.4% YoY. 

 

The -60% decline in private sector aircraft orders weighed on the headline, Durables ex-Defense and Aircraft – which aligns most closely with what actual households buy – remained negative year-over-year (-1.8%) for a 4th consecutive month. 

 

Meanwhile, Core Capital Goods Orders fell -3.7% YoY, extending its epic run of negative capital spending growth to 17 of the last 18 months = the most dismal non-recession/peri-recession streak basically ever.

 

Here's the detailed Durable goods breakdown (as you can see, it's a sea of red):

 

Click image to enlarge

Ouch! Durable Goods: Neither Durable Nor Good - durable goods 7 27


Daily Market Data Dump: Wednesday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, rates and bond spreads, key currency crosses, and commodities. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Wednesday - equity markets 7 27

 

Daily Market Data Dump: Wednesday - sector performance 7 27

 

Daily Market Data Dump: Wednesday - volume 7 27

 

Daily Market Data Dump: Wednesday - currencies 7 27

 

Daily Market Data Dump: Wednesday - rates and spreads 7 27

 

Daily Market Data Dump: Wednesday - commodities 7 27


TWTR | Worse than the Guide (2Q16)

Takeaway: We thought it was crazy to think that Legacy O&O could decline in 2Q; now it may not be that crazy to think Total Ad Rev declines in the NTM

KEY POINTS

  1. 2Q16 ≠ SANDBAG: We were expecting upside to 2Q Ad revenue since mgmt’s guidance implied either a y/y decline in its Legacy Owned-&-Operated (O&O) Ad business, or no sequential growth in either Non-O&O or Auto-Play.  We had a hard time believing either scenario was possible, but we actually got a combination of both.  The Non-O&O business sequentially declined into a seasonally stronger 2Q, and we estimate that Legacy O&O declined y/y in the mid-single digit range.  Auto-Play was the sole bright spot, producing an estimated 80% of its total Ad revenue growth in 2Q.  The 3Q guide was pretty dreadful; TWTR’s total revenue guidance was actually below what consensus was assuming for just the Advertising segment.  The 3Q guide is effectively calling for Ad revenue growth somewhere in the single-digit range depending on mgmt's assumptions for its Data segment.  The knee-jerk reaction is to assume 3Q was sandbagged, but the 2Q guide presented the same way.
  2. AUTO-PLAY = LEGACY SIPHON: It’s becoming clearer that Auto-Play is not a stand-alone growth driver, but is rather pulling engagements/budget away from its Legacy O&O ads.  This mix-shift dynamic will likely continue given the lower Auto-Play engagement threshold; especially since the more Auto-Play ads that TWTR introduces into a user’s feed, the less likely they are to directly engage with its Legacy CPC ads, which require user interaction to produce revenue.  So even if advertisers are still allocating and/or increasing budget to Legacy O&O, it doesn’t mean those budgets will actually be fulfilled; especially if TWTR continues to struggle to produce user growth.  Further, as we move through the NTM when TWTR has Auto-Play fully baked into its comps, it's possible that Total Ad revenues decline in the NTM since Auto-Play engagement growth will now be driven almost exclusively by ad load, which could exacerbate the legacy-siphon dynamic further.
  3. WHERE'S THE BOTTOM? It may sound crazy to think that Total Ad revenues may starting declining in the NTM, but the thought of its Legacy O&O business declining sounded crazy before its 2Q results.  For context, the 2Q pressure in Legacy O&O Ad revenue happened before TWTR fully comped past its Auto-Play launch.  We estimate that Auto-Play represents less than 20% of its total O&O Ad revenues, so there is a lot of Legacy O&O budget at risk just from user ad fatigue alone (Point 2).  Further, the sequential decline in Non-O&O points to another potential source of declining revenue against peak comps over the next 2 quarters.  We’re lucky TWTR isn’t down near LNKD-4Q15 levels off this print, especially considering TWTR's +30% rally since the LNKD-MSFT deal.  So we may get another shot at the short, which we had covered prematurely thinking TWTR may have bottomed out.  But considering that there isn't any clear way to fix TWTR's model, it may just mean there isn't a bottom in sight outside potential take-out value, which we doubt would be anywhere near its $10B EV when both its revenues and users are trending toward decline.  

 

Let us know if you have any questions, or would like to discuss further.

 

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet

 

TWTR | Worse than the Guide (2Q16) - TWTR   Non O O 2Q16

TWTR | Worse than the Guide (2Q16) - TWTR   Incremental Ad Revenue by Source 2Q16 


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

next