Contributed by: Jaclyn Jackson
One of the most common ways to monitor consumer confidence and investor sentiment is to watch fund inflows and outflows. Market analysts use fund flows to measure sentiment within asset classes, sectors, or markets. This information (combined with other economic indicators) help identify trends and determine investment opportunities.
July trends picked up where June left off, as international equities and taxable bonds continued to receive inflows.
Most of these flows came through passive funds, but active flows were still positive. Conversely, US equities saw outflows as valuations appear to be fair or high (depending on whom you ask) and administration confidence declines. Accordingly, The International Monetary Fund decreased their US GDP growth forecast from 2.3% to 2.1%. In terms of internationals, investors are opting for developed markets through foreign large blend funds. Ultimately, this is a play for Europe. The International Monetary Fund increased its expected growth rate from 1.7% to 1.9% in Europe. Investors also sought out emerging market funds as the MSCI Emerging Markets index has double-digit returns year to date (28.3% returns YTD at the end of August).
In August, international equity inflows were positive but less positive than in July.
The slowdown reflects lackluster corporate earnings internationally and uncertainty about North Korea. Nonetheless, internationals remain compelling to investors with rebounds from Japan and Europe progressing. MSCI EAFE returns have remained ahead of the S&P 500 in 2017. Taxable bonds, specifically intermediate-term bond funds, remained the leading category group for inflows. Intermediate bond funds hit the “sweet spot” for many investors because they are usually not as severely impacted by rising rates as long term bonds and typically generate more return than short term bonds. From January 1st through August 15th, intermediate bonds gained 3.2% beating both the Bloomberg Barclays US Bond Index and 2016 returns. Differing from June and July, investors are trending back towards active management for their bond funds.
As of writing this, October 4th, 2017, September flows mimic July and August with outflows from US equities and continued inflows to international equities and taxable bonds.
There are also positive inflows for municipal bonds and alternatives. Outflows from the US are mostly from growth (especially large growth) and US large blend funds. International equities experienced outflows last week, but are net positive for the month. Bond inflows are steady with investors largely continuing to invest in intermediate term bond funds as wells as modestly investing in high yield municipals funds and national intermediate municipal bonds.
Bonds Lead the Pack
Even as rates rise, investors continue to pour assets into bond funds. Why is that the case? Income and diversification seem to motivate the trend. Even if interest rates rise and bond prices go down, investors still want the guaranteed income stream bonds provide. Some may also feel they can pick up higher payouts from new bond issues as interest rates increase. In terms of diversifications, investors have seen gains from their US equities and feel like it is time to rebalance into a true stock diversifier; bonds.
Jaclyn Jackson is a Portfolio Administrator and Financial Associate at Center for Financial Planning, Inc.®
This information does not purport to be a complete description of the securities, markets, or developments referred to in this material; it has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of Jaclyn Jackson and are not necessarily those of Raymond James. This information is not a complete summary or statement of all available data necessary for making and investment decision and does not constitute a recommendation. Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Asset allocation and diversification do not ensure a profit or guarantee against loss. Past performance is not a guarantee of future results. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations. The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Barclays Capital US Aggregate Index is an unmanaged market value weighted performance benchmark for investment-grade fixed rate debt issues, including government, corporate, asset backed, mortgage backed securities with a maturity of at least 1 year. Please note direct investment in any index is not possible.