March 15, 2013

Lipper Fund Flows: What Great Rotation? Investors Favor Stocks And Bonds

by Tom Roseen.

Investors seem quite content to remain in ‘risk-on’ mode, despite warnings that the stock market rally is getting long in the tooth and may stall, and that optimism was reflected in their willingness to continue to invest in small-cap stocks and corporate bonds in the week ended March 13.

Investors continued to downplay the litany of potential market headwinds – concerns about Europe, sequestration in the United States, slower consumer spending and weaker industrial production in China – to focus instead on the fact that unemployment in the U.S. hit a four-year low of 7.7% in February. The enthusiasm continued to push stocks higher, propelling the Dow Jones Industrial Average to its ninth consecutive day of gains on Wednesday, marking the blue-chip index’s longest such winning streak since November 1996. (It also marked the seventh record close in a row.)

Unsurprisingly, perhaps, investors continued to be net purchasers of mutual fund and exchange traded fund (ETF) assets for the week, injecting nearly $10 billion into all kinds of funds for the week ended March 13, according to data released late yesterday by Lipper, a division of Thomson Reuters. Not all kinds of funds joined the party, however, as investors made clear their continued preference for ‘risk on’ assets. For the second consecutive week, both municipal debt funds and money market funds suffered net redemptions, to the tune of $113 million and $2.4 billion, respectively, as investors remained in a risk-on mode.

Conventional equity funds and equity ETFs, however,reported net inflows of $11.3 billion in the just-ended week, marking the eleventh week within the last twelve weeks in which they have attracted new assets on a net basis. Those inflows arrived in the face of an increasingly vocal group of market analysts and strategists warning of a possible near-term pullback in the stock market, given the rapidity and magnitude of its gains so far this year. For the second week running, equity ETFs experienced net inflows, taking in some $8.3 billion (the largest they have reported since the beginning of January), while their conventional mutual fund brethren took in $3 billion. That brings net inflows for mutual funds to a total of $69.1 billion so far this year, in ten consecutive weeks of asset gains.

As might have been expected, given that the strong stock market gains had left the S&P flirting with breaking above its 2007 highs to set a new record, the ETF that attracted the largest dollar amount of new assets was SPDR S&P 500 ETF, which pulled in $3.2 billion. It was followed by iShares MSCI Japan ETF and WisdomTree Japan Hedged EquityETF, which reported net inflows of $539 million and $426 million, respectively. Those inflows came in response to news that ‘Abenomics’, the economic policies of the country’s new prime minister, Shinzo Abe, may be bearing fruit: Japan’s GDP rose 0.2% in the fourth quarter. As gold prices remain in the doldrums, the SPDR Gold was at the bottom of the ETF heap, handing back some $415 million for the week.

In the mutual fund arena, domestic equity funds witnessed net inflows of $1.4 billion, while their nondomestic equity fund counterparts took in some $1.6 billion. Breaking a recent trend, small-cap domestic mutual funds were the biggest winners, attracting a net $500 million of new assets for the week. On the other side of the coin, those funds in Lipper’s Emerging Markets Funds classification – market darlings for much of the year — attracted only a little more than $200 million in the week, marking only the second time in the last ten weeks inflows have fallen below $1 billion.

Investors continued to pour cold water on the idea that there is some kind of great rotation underway from bonds into stocks that explains why the stock market rally this year has been so robust. In fact, investors seem far from averse in adding to their bond fund holdings, injecting a net new $1.2 billion of assets in the week that just ended.What is clear, however, is that investors are more comfortable with risk, putting $1.8 billion into corporate investment grade debt funds (which marked their 39th consecutive week of inflows). Within that broad category, Bank Loan Funds accounted for $1.1 billion of inflows (the third largest weekly total since Lipper began tracking fund flows on a weekly basis in 1992) and Flexible Income Funds attracted some $900 million of net new assets. Meanwhile municipal debt mutual funds reported net outflows of $300 million.

For more information on this week’s fund flows data, please refer to Lipper’s U.S. fund flows website or this video.

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