A quick look at a timely topic of interest - with a brief review of why it could matter to investors.

Chart of the Week

March 9, 2015

Do bonds have more fun?
Net new cash flow into long-term mutual funds, rolling 12-month basis


Source: Investment Company Institute, as of 3/4/15. February 2015 data reflects estimated flows as of 2/25/15. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • Where is money flowing in the US? Among long-term fund investors, the answer is bonds—at least for now.
  • Inflows into long-term bond funds have eclipsed those of long-term stock funds over the past 12 months
  • That's a notable contrast from the period Oct 2013 through July 2014—when trailing 12-month flows¹ were predominantly directed toward long-term stock funds
  • That period, however, was a short-lived reversal of the dominant trend in previous years toward bond funds.
  • The shift is commonly attributed to the impact of fears that the Federal Reserve (Fed) might shortly begin to wind down its policy of quantitative easing in the face of quickening US economic growth.
  • However, those concerns have faded with headline inflation actually lower than a year ago thanks to lower oil prices, while the rate of core inflation is unchanged.² And while growth has improved, it has hardly blown the doors off expectations.
  • Against that backdrop, it's not surprising that net flows into bond funds turned positive again on a trailing 12-month basis in late 2014.
  • The renewed enthusiasm for bonds may seem surprising given the low level of US interest rates. But that ignores the fact US rates are quite attractive relative to those of many other developed markets.
  • Whatever the reasons behind the recent pickup, it should be noted that "long-term bond funds" is a broad category, and sub-categories of the bond market could be experiencing more inflows than others.
  • At the same time, recent flow data—echoing the past five years³—could be a sign that a healthy dose of pessimism still exists about equities and that's something that usually isn't present at peaks in the stock market.

The chart:

  • The chart shows net inflows into long-term stock and bond mutual funds on a rolling 12-month basis between February 2010 and February 2015. Showing flows on a rolling 12-month basis instead of on a monthly basis helps to provide a better picture of the longer-term trend by smoothing out monthly swings.
  • Net inflows into long-term bond funds for the 12 months ended February 25, 2015 were nearly $65 billion compared to about $9 billion for long-term stock funds—which includes both US and global stock mutual funds.
  • For the year ending February 28, 2014, long-term stock funds experienced net inflows of approximately $151 billion compared with net outflows of over $112 billion for long-term bond funds.
  • Note that on a rolling 12-month basis over the past five years, net inflows into stock funds exceeded that into bond funds from October 2013 through November 2014, but other than that bond flows have significantly exceeded stock flows over the past five years.


¹ Showing flows on a rolling/trailing 12-month basis instead of on a monthly basis helps to provide a better picture of the longer-term trend by smoothing out monthly swings.

² Source: Bloomberg. In February 2014, CPI inflation on a year over year basis was 1.1% and in January 2015 (latest available) it was -0.1%. Core inflation was 1.6% in February 2014 and 1.6% in January 2015.

³ In cumulative terms, net inflows into long-term bond funds over the past five years totaled $9.6 trillion compared with net outflows of $1.1 trillion from stock funds.


The Investment Company Institute (ICI) is the national association of U.S. investment companies, including mutual funds, closed-end funds, exchange-traded funds (ETFs) and unit investment trusts (UITs) that seeks to encourage adherence to high ethical standards, promote public understanding, and otherwise advance the interests of funds, their shareholders, directors, and advisers

The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The Consumer Price Index (CPI) measures the average change in U.S. consumer prices over time in a fixed market basket of goods and services determined by the U.S. Bureau of Labor Statistics.

The Core Consumer Price Index (Core CPI) excludes the prices of food and energy, which are volatile on a monthly basis, from the basket of goods used to determine the CPI.

Quantitative easing (QE) refers to a monetary policy implemented by a central bank in which it increases the excess reserves of the banking system through the direct purchase of debt securities.


The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice.

Common stocks generally provide an opportunity for more capital appreciation than fixed-income investments but are subject to greater market fluctuations.

Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

Outperformance does not imply positive results.

Dividends and Yields represent past performance and there is no guarantee they will continue to be paid.

This material is for information only and does not constitute an invitation to the public to invest in any funds, securities, strategies or other products. You should be aware that the investment opportunities described should normally be regarded as longer term investments and they may not be suitable for everyone. All investments involve risk, including possible loss of principal. The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Past performance is no guide to future returns and may not be repeated. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. Unless otherwise noted the "$" (dollar sign) represents U.S. Dollars.

Please note that an investor cannot invest directly in an index. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed and is not a complete summary or statement of all available data. Individual securities mentioned are intended as examples of portfolio holdings and are not intended as buy or sell recommendations. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice. The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.

This material is only for distribution in those countries and to those recipients listed.

All investors in the UK, professional clients and eligible counterparties in EU and EEA countries ex UK and Qualified Investors in Switzerland:
Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444.

All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

Qualified domestic institutional investors in the People's Republic of China (PRC), Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in the PRC and Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

This material has not been reviewed by any regulatory authority in the PRC, Korea or Taiwan.

All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which may include Legg Mason International - Americas Offshore. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.

All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) ("Legg Mason"). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client's professional advisers.


Previous Editions

Click on a date to view that week's edition of charts.


Will the current wave of central bank easing jump-start the world's economies?


Will the current wave of central bank easing jump-start the world's economies?

No - The real issues are structural - real progress on labor reform and regulatory excess will have more impact
No - Deflation is already taking hold, making monetary policy changes ineffective
Yes - The US model shows that monetary easing can help economies heal in the medium term
Yes, but it will take even  longer than it did in the US, and the delay will have a negative political impact

Previous month Poll

What would be the best news for markets for the remainder of the year?

Strong US corporate earnings validate US economic expansion
Strength in the US dollar convinces the Fed to keep short rates low longer
European Central Bank bond buying rekindles growth in European Union countries
Growth in China strong enough to leave room for financial system and structural reform