Thu, 11 Oct 2012
Although investors may remain broadly skeptical of equity markets, asset flow data suggest they could be taking more risk than expected in other asset classes.
Christine Benz: Hi I'm Christine Benz for Morningstar.
Investors have been selling equity mutual funds recently, but they’ve been making an exception for dividend-focused funds.
Joining me to discuss the latest trends in mutual fund inflows and outflows is Mike Rawson; he is a fund analyst with Morningstar.
Mike, thank you so much for being here.
Mike Rawson: Thanks for having me, Christine.
Benz: Mike, you noted in a recent report that equity mutual funds have seen $83 billion in outflows so far in 2012, despite a very strong equity market. What happens when you add ETF flows back in? So $83 billion [has flowed] out of traditional mutual funds. Have equity [ETFs] actually gathered assets?
Rawson: Equity ETFs have gathered assets--about $37 billion. So, you mentioned that $83 billion have flowed out of equity mutual funds. ETF flows are about $37 billion, so it offsets some of that declined, but not all of it.
So with the ETF flows, it’s indicative of people maybe preferring some passive products in this environment, but still generally skeptical with the equities market overall.
Benz: And you're seeing that trend toward passive products even in the traditional mutual fund space, so it's not just ETFs, traditional index mutual funds too?
Benz: So, you noticed that one area that has actually been a pretty strong pocket within the equity universe is that group of dividend-focused funds. Let's talk about what have been some of the bigger asset gatherers within that space.
Rawson: Vanguard has really been a big winner here, because they offer products on both the open-end side and the ETF side.
On the open-end side, they’ve got a fund called Vanguard Dividend Growth, which is really popular. On the ETF side, there are two funds that have attracted assets, Vanguard Dividend Appreciation and Vanguard High Dividend Yield. So, Vanguard has been able to benefit on both sides of the structure.
Another fund that's similar on the mutual fund side is BlackRock Equity Dividend, and that fund has attracted strong assets, and we think it makes sense in this environment where interest rates are so low, people look at that dividend yield and are attracted to take some equity risk, as long as they’re getting compensated through the dividend.
Benz: So, those are some of the big beneficiaries.
Bond funds, too, in your report you noted have seen very big inflows. This kind of confound some observers, because we have had very strong equity returns, also decent bond returns, but you noted that investors really seem to be in risk-on mode when they're looking at bond funds. What types of bond funds have been seeing the big flows recently?
Rawson: Absolutely. When you look at the high level, just on the surface it appears that people are shunning equities and going into fixed income, and initially that would sound like investors are skeptical of taking any risk. But when you look at that fixed-income segment, you notice that the funds aren’t going into your traditional government bond, your safe-type investments. So, where have they been going? They’ve been going into riskier areas of the fixed-income market, for example emerging-market bonds, high-yield bonds, a new category of non-traditional bonds, multisector bonds. And these are categories which generally behave with more volatility and more correlation to stocks.
In some ways I think it's kind of ironic that people want to avoid stocks, but they're not going into government bonds. So, that traditional rule of thumb that we always use, maybe 60% of your assets in equities, 40% in bonds, well that 40% was not talking about high-yield bonds; that was government bonds. So, when investors go to these high-risk segments, they need to realize that yes, I'm gaining yield, but I’m also taking risk.
Benz: So, your point is that people could be, in some cases, getting sort of equity-market-like risk with some of these asset classes, especially junk bonds?
Rawson: Absolutely. And that's really what the Fed is trying to do. They're trying to encourage people to take risk, which spurs the markets, spurs capital formation. A lot of companies on the corporate side have been issuing high-yield bonds. It's helping these companies go out and fund their business and hopefully spur the economy.
Benz: And the flows data also show that money market funds have had a very bad time here. They're losing a lot of assets. Do you think it's going to bond funds, leaving money market funds?
Rawson: Absolutely. There is really no sense for people to continue to hold money in money market funds, particularly when you’re not getting any return, and we know you're getting some loss from inflation.
Benz: So, let's look at the fund family winners in all of this: PIMCO again leading the way in terms of year-to-date flows. I assume that’s just part of this general appetite for bonds. What else is going on there?
Rawson: PIMCO, of course, was a big winner when the markets are looking for bond funds, and really their entire lineup was strong, but of course they’re standout fund, the PIMCO Total Return, was the biggest gatherer of assets for PIMCO.
Interesting that another fund with a similar kind of strategy, DoubleLine Total Return, they also had really strong flows, and I think, there again, both of those funds, PIMCO Total Return and DoubleLine Total Return are overweight mortgage-backed securities. These are the agency mortgage-backed securities that the Fed is targeting with its quantitative easing program. [The Fed] made the statement that they're going to be purchasing these every month; that could help that market going forward, and so investors have picked up on that. So both of those funds gathered assets and had a good performance for the month.
Benz: There was another name on the list that was a new one to me. Maybe we can talk a little bit about it. It’s Virtus.
Benz: The firm was actually one of the month’s best asset gathers. Let's talk about what some of the funds are that people have been buying within that firm's lineup?
Rawson: Yes. So, Virtus had a strong month, but they’ve also had a strong year. And two of their larger funds, one is an emerging-market fund and the other one is a multisector bond fund, these two funds happen to be in categories that are really interesting to investors at this time. We mentioned that investors are looking for emerging-market exposure. They're looking for non-traditional bond exposure. So, both of these funds are large for Virtus, and both of these funds have 5-star performance track records, and as we know, good performance tends to help gather assets. Just to note that both of these funds are subadvised; The emerging-market bond fund is subadvised by Vontobel, and the multisector bond fund is subadvised by a newer firm called Newfleet.
Benz: OK, Mike. Thank you so much for sharing your insights on the latest in fund flows.
Rawson: Christine, thanks for having me.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.