Risk speedometer: Cash for the holidays?

December 27, 2017

 

Key highlights

  • The 1-month risk speedometer fell significantly in November, reversing its two-month trend, and landed well below its 5-year average. The 3- and 12-month speedometers remained below their 5-year averages.
  • Global equity funds and ETFs took in $19.2 billion in total, with developed international and emerging markets funds and ETFs gathering almost all the cash flow.
  • U.S. bond funds and ETFs gathered $25.5 billion, while money market funds took in $52.5 billion.
 

Global equity markets continued their up streak in November, rising 2.0%, as represented by the FTSE Global All Cap Index. Global equity funds and ETFs gathered a net $19.2 billion, making November the tenth positive month for net equity cash flow in 2017. Net flows into non-U.S. equity categories continued to be significantly stronger than those into U.S. equities. Developed international and emerging markets products gathered $15.5 billion and $3.2 billion, respectively, while U.S. equity products had $1.4 billion in net outflows. (Sector flows accounted for the remainder of the total equity flow).

Despite the strong equity performance, investors clearly favored less risky assets, directing $25.5 billion to taxable and tax-exempt U.S. bond funds and ETFs and more than twice that to money market funds, a net of $52.5 billion.

Vanguard's risk speedometers for November 2017

Vanguard's risk speedometers November 2017

Notes: Vanguard's risk speedometers measure the difference between net cash flows into higher-risk asset classes (U.S. equity, international equity, emerging markets equity, sector equity, alternative, and other taxable bond) and lower-risk asset classes (U.S. taxable bond, tax-exempt bond, and money market). The lighter-shaded areas represent values that are within 1 standard deviation from the mean, which means they occur roughly 68.2% of the time (34.1% higher and 34.1% lower). The middle shades represent readings between 1 and 2 standard deviations from the mean, occurring about 27.2% of the time (13.6% higher and 13.6% lower). The dark edges represent values more than 2 standard deviations from the mean, occurring the remaining 4.6% of the time (2.3% higher and 2.3 % lower). Speedometer values for previous periods may change from what was initially reported as the current value in prior periods because of changes made in the Morningstar, Inc., data and to the updating of the five-year average.

Source: Vanguard calculations, using data provided by Morningstar, Inc., as of November 30, 2017.

The uneven flows between risky and less risky assets resulted in the 1-month risk speedometer reversing its two-month trend and dropping significantly in November to well below its 5-year average. The 3- and 12-month speedometers remained below their 5-year averages.

A perspective into the low risk speedometer readings

Not only did November's 1-month risk speedometer have a large drop from its October reading, but if we also look at speedometer readings for the past 15 years, November's 1- and 3-month levels rank below or near the bottom quartile of readings.

How risk-averse? November's levels compared with those for the last 15 years

How risk-averse? November's levels compared with last 15 years
Source: Vanguard calculations, using data provided by Morningstar, Inc., as of November 30, 2017.

With the exception of October, the monthly speedometer has been fairly low since June. As the global equity markets have continued to hit record highs, it has been a bit surprising to see such low investor risk appetite, particularly since performance chasing has historically been so prevalent. There are many plausible explanations for this behavior, including a trend away from performance chasing and toward asset allocation and portfolio rebalancing. For now, the cash-flow behavior we have witnessed—largely contrarian to market direction—is a positive sign and one we will continue to monitor.

Highest net inflows and outflows

Top winners
1-month inflows ($B) 3-month inflows ($B) 12-month inflows ($B)
Money market52.5 Money market69.0 Inter.-term bond139.5
Inter.-term bond15.1 Inter.-term bond45.1 Foreign large blend132.4
Foreign large blend9.3 Foreign large blend28.1 Large blend 114.1
 
1-month inflows (% of AUM) 3-month inflows (% of AUM) 12-month inflows (% of AUM)
Trading-inv. cmdty.16.1 Trading-inv. cmdty.41.2 Misc. sector85.8
Trading-levgd. debt9.0 Misc. sector26.2 Volatility82.3
Misc. sector6.8 Trading-levgd. debt15.9 Trading-levgd. debt56.4

Note: Cash flows exclude funds of funds.

Source: Vanguard calculations, using data provided by Morningstar, Inc., as of November 30, 2017.

Top losers
1-month inflows ($B) 3-month inflows ($B) 12-month inflows ($B)
High-yield bond–5.6 Large growth–11.3 Large growth–58.9
Balanced funds–2.5 Large value–7.5 Large value–24.2
Large growth–2.4 Balanced funds–7.2 Balanced funds–16.8
 
1-month inflows (% of AUM) 3-month inflows (% of AUM) 12-month inflows (% of AUM)
Trading-levgd. cmdty.–12.2 Cmdty. energy–20.4 Cmdty. energy–31.9
Cmdty. energy–8.8 Trading-levgd. cmdty.–15.1 Trading misc.–21.2
Single currency–6.3 Single currency–11.6 Trading-levgd. cmdty.–17.0

Note: Cash flows exclude funds of funds.

Source: Vanguard calculations, using data provided by Morningstar, Inc., as of November 30, 2017.

More about Vanguard's risk speedometers

We've long tracked industry net cash flows to develop insights into what investors, collectively, are doing with a substantial portion of investable assets.1 Our risk speedometers—our unique lens on investor behavior that we introduced in January—and related cash-flow research also highlight trends that may not be apparent in raw cash-flow data. The result is a nuanced picture of how investors behave. These nuances sometimes reveal that the reality of investor behavior is more complex than conventional wisdom suggests.

Fran Kinniry, Don Bennyhoff, and Yan Zilbering of Vanguard Investment Strategy Group developed the risk speedometers to gauge the level of risk investors are taking in a given period. It's simply the difference in net cash flow between higher-risk asset classes, such as stocks, and lower-risk asset classes, such as fixed income. The speedometers compare investors' current risk-taking with longer-term averages.

1 According to data from Morningstar, Inc., assets under management for U.S. open-end mutual funds, money market funds, and ETFs totaled $17.7 trillion as of December 31, 2016.

Notes:

  • All investing is subject to risk, including possible loss of principal.
  • Diversification does not ensure a profit or protect against a loss.
  • Investments in bond funds are subject to interest rate, credit, and inflation risk.
  • Foreign investing involves additional risks, including currency fluctuations and political uncertainty.
 

Our insights straight
to your inbox

Our insights straight to your inbox

Receive our latest Advisor's Digest
research
and commentary sent the
first business
morning every week.

A weekly digest of our latest research and commentary. Topics include the economy and markets, portfolio strategy, ETFs, and practice management.


Fund openings/closings, fund manager changes, dividend distributions, webinars, and other events you might want to know about.



Already registered? Log on to
manage your
email subscriptions.