May 26, 2017

U.S. Weekly FundFlows Insight Report: Political Drama Continues to Weigh On Fund Investors

by Tom Roseen.

After a dour week of politically charged market declines investors appeared to shrug off Washington concerns as economic data provided a glimmer of hope during Thomson Reuters Lipper’s fund-flows week ended May 24, 2017. Market indices were able to string together five consecutive days of plus-side returns (their longest run since February of this year) and in some cases erased the losses witnessed the prior week. Investors embraced news of improving initial jobless claims, a jump in the Philadelphia Federal Reserve manufacturing index, and strengthening oil prices during the week, but it wasn’t enough to keep many fund investors engaged.

Weekly Wrap Up

For the first week in three investors were net sellers of fund assets (including those of conventional funds and exchange-traded funds [ETFs]), withdrawing $5.5 billion. While investors were net redeemers of equity funds, pulling out a whopping $10.1 billion for the week (their second largest weekly net redemptions for 2017), they were net purchasers of taxable bond funds (+$2.4 billion), money market funds (+$1.7 billion), and municipal bond funds (+$0.4 billion).

At the beginning of the fund-flows week investors appeared to shrug off the political drama from Washington and the news from Brazil that opposition lawmakers were calling for the resignation of President Michel Temper because of reported bribery allegations. Investors instead focused on news that U.S. initial jobless claims had fallen 4,000 the prior week and that continuing claims were at their lowest level since 1988. Market moves were further supported by news that the Philadelphia Fed manufacturing index rose to 38.8 in May from 22.0 in April. Stocks continued to fare well on Friday even after investors learned that a current White House official was a person of interest in the Russia probe. Despite unusually low volume on the major exchanges, the U.S. markets made broad-based advances on Monday as defense stocks rallied on news of a $350-billion arms deal between Saudi Arabia and the United States. In the face of the devastating suicide bombing at an Ariana Grande concert on Tuesday in Manchester, England, that left at least 22 people dead and scores injured, the Eurozone purchasing managers index came in at a six-month high, showing the economy was gaining strength and providing a catalyst for equity investors. And investors pushed up oil prices for a fifth consecutive day on hopes that OPEC will extend production cuts into 2018. On the last day of the fund-flows week investors pushed the S&P 500 Index and the Dow Jones Industrial Average to a five-day winning streak after the May Federal Reserve Board meeting minutes showed broad agreement by FOMC members about shrinking the central bank’s balance sheet and  a probable rate hike at the Fed’s next meeting in June.

Exchange-Traded Funds

For the first week in seven equity ETFs witnessed net outflows, handing back just a little over $3.9 billion for the flows week. Authorized participants (APs) were net sellers of domestic equity ETFs (-$6.1 billion), redeeming money from the group for the fourth consecutive week. For the twenty-second week running nondomestic equity ETFs witnessed net inflows, this past week attracting $2.2 billion. iShares MSCI EAFE ETF (+$827 million), iShares MSCI Brazil Capped ETF (+$526 million), and iShares MSCI Eurozone ETF (+$458 million) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum iShares Russell 2000 ETF (-$1.8 billion) experienced the largest individual net redemptions, and SPDR S&P 500 ETF (-$1.6 billion) suffered the second largest net redemptions for the week.

Conventional Equity Funds

For the ninth consecutive week conventional fund (ex-ETF) investors were net redeemers of equity funds, redeeming $6.2 billion. Domestic equity funds, handing back a little more than $4.9 billion, witnessed their twenty-first week of net outflows despite posting a 1.95% return on average for the flows week, while their nondomestic equity fund counterparts, posting a 1.11% return on average, witnessed net outflows (-$1.2 billion) for the third week in a row. On the domestic equity side fund investors continued to lighten up on large-cap funds (-$2.5 billion net), while on the nondomestic side they shunned global equity funds (-$1.7 billion).

Conventional Fixed Income Funds

For the sixth consecutive week taxable bond funds (ex-ETFs) witnessed net inflows, taking in $0.6 billion. Corporate investment-grade debt funds witnessed the largest net inflows of the group, taking in $0.7 billion, while government-Treasury funds (+$125 million) and flexible portfolio funds (+$83 million) witnessed the next largest net inflows. Corporate high-yield funds (-$221 million) witnessed the largest net redemptions of the group for the week. With investors pricing in the probability of a June rate hike at 88%, according to the CME FedWatch Tool, it wasn’t too surprising to see Lipper’s Inflation-Protected Bond Funds classification taking in net new money for the twenty-ninth consecutive week (+$25 million) and bank loan funds witnessing their twenty-eighth week of net inflows, attracting some $194 million for the week. For the seventh week in a row municipal bond funds (ex-ETFs) witnessed net inflows, taking in some $344 million for the week.

Weekly U.S. Fund Flows Video Series—May 24, 2017

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