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

chart

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.


Definitions:

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.


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Previous Editions

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Poll

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








Poll

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
(31%)
No - Deflation is already taking hold, making monetary policy changes ineffective
(2%)
Yes - The US model shows that monetary easing can help economies heal in the medium term
(16%)
Yes, but it will take even  longer than it did in the US, and the delay will have a negative political impact
(51%)



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
(33%)
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(9%)
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