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Volatility, Valuations, Rates Driving Slowdown in Fund Flows

Christine Benz

Note: This video is the second of a six-part interview between Morningstar director of personal finance Christine Benz and Vanguard president and CEO Tim Buckley.

Christine Benz: Let's talk about inflows into Vanguard specifically. They have been quite robust overall. But in 2018 so far, we have seen a little bit of a slowdown. To what do you attribute that, and is that a cause of concern for you?

Tim Buckley: The slowdown we are seeing is actually an investor and a market slowdown. Flows to mutual funds overall are down about, as you know, 55%. Vanguard, you run the numbers, we're going to be a lot less than that, down to, say, 44% to inflows, which means we are actually doing better in terms of the market share we are picking up, taking about 74% of industry flows so far this year. It's been a strong year in relative flows. 

But why are flows down overall? You can attribute it to a lot of things. We saw a bit more volatility in the market this year. Valuations are higher. Investors are a little bit more concerned. There's a lot of saber-rattling from a trade standpoint, concerns about the economy, where it might go. Christine, importantly, with rising rates, people are getting paid for their cash.

Benz: Cash is more attractive.

Buckley: Cash is more attractive. You're going to be paid to sit on the sidelines a little bit. If you actually look within our direct business where people invest directly with us, and they have the option to use our money market funds, those flows are strong this year as they were last year. They are just not going to equities and bonds. They are going more into money markets. The areas where we are down are where we are selling through advisors, where we don't have the option where people can't use our money market funds. It really is investor behavior that's driving it. They are more risk-averse.

Benz: Getting back to fund flows, when we look at them, we've been seeing somewhat contrarian behavior in that we've been seeing decent flows into bond funds as well as into international equity at a time when domestic equity has outperformed. Let's talk about that. Do you think that we are seeing some lasting improvement in investor behavior and what sort of things will you be looking at ahead to see if maybe that contrarian instinct will hold?

Buckley: I haven't seen enough to say that investors aren't procyclical. We always have to watch that behavior. The tendency has been to chase return, and I don't think we have broken that cycle yet. There isn't enough data to prove otherwise. There are always these periods where they seem to be going counter where the markets are going, but then when returns take off--look, flows are coming back in now because the equity markets in the U.S. are moving along.

We do look at that risk speedometer or risk appetite, and it is down. It's been down for a little while now. It has something to do with the valuations. It has something to do with the volatility we talked about. Is it that behavior has truly changed? I haven't seen enough to actually truly believe that. If that's the case, that's fantastic. I knew at the beginning of the year there was actually a lot of tactical asset allocation going on where people were thinking, the U.S. has had its run, now it's time for Europe to have its run. It hasn't worked out that way. What we'd like to see is people just setting their asset allocation, rebalancing to it and staying, not try to time the markets, just stay consistent with them.