Risk speedometer: Risk moderates

April 18, 2019

 

Vanguard's risk speedometers, developed by the Investment Strategy Group's advisor's alpha research team, are intended to inform you of industry trends so you can proactively have effective client conversations on what investors are currently doing with their cash flows in '40 Act funds. For example, a large drop in the risk speedometers may suggest uncertainty or fear among investors. Knowing this broader trend enables you to strengthen the client relationship by reaching out to your clients with guidance and behavioral coaching.

In March, the 1-month risk speedometer moderated a bit, approaching—but remaining below—the 5-year average. On a 3- and 12-month basis, the risk appetite remained well below the 5-year averages.

Vanguard's risk speedometers for March 2019

Risk speedometer March 2019 vs February 2019: 1 month endedRisk speedometer March 2019 vs December 2018: 3 months endedRisk speedometer March 2019 vs March 2018: 12 months ended

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 the updating of the 5-year average.

Source: Vanguard calculations, using data provided by Morningstar, Inc., as of March 31, 2019.

General trends—Market returns and cash flows

U.S. equity funds and ETFs recorded strong net inflows of $6.3 billion in March, nearly double those in February. However, ETFs were the real story, capturing $20.4 billion, while index funds captured $3.8 billion. U.S. active equity funds posted outflows for the 60th consecutive month, losing $17.9 billion.

Global equity markets continued their upward momentum, gaining 1.1% for the month and 12.3% for the quarter, as represented by the FTSE Global All Cap Index. Despite the positive returns, developed international equity funds and ETFs recorded net outflows of $2.6 billion. That said, the $5.0 billion of inflows to index funds were offset by outflows of $0.7 and $6.9 billion from ETFs and active funds, respectively. Emerging markets funds and ETFs continued their strength, capturing $3.9 billion while also exhibiting broad strength across all product types.

U.S. taxable bond funds and ETFs continued to show impressive strength in March and again were the main driver in risk-off sentiment, capturing $31.7 billion. Flows were strong across all product segments, with active funds capturing half the net flows. Intermediate-term bond funds and ETFs were again the largest contributor to the overall flow, with $18.7 billion. The Ultrashort Bond category marked its 32nd consecutive month of inflows, with $3.4 billion.

Money markets experienced outflows of $13.3 billion, a large driver of the uptick in risk appetite. That said, our previous research on this phenomenon noted that money markets have routinely shown outflows in the months of March and April, a seasonal trend that may suggest that investors are using these cash flows to pay taxes as well as fund IRAs.

A detailed look at cash flows and returns

While our risk speedometers offer a broad view of investor behavior, there can also be value in looking at more detailed cash-flow data. To that end, the tables below show cash flows over a wide range of periods and also the categories' relative return performances.

Cash leaders, absolute dollar flows, and returns, as of March 2019

How to read this table: The top left square tells you that Morningstar's Intermediate-Term Bond category had the largest absolute inflow, while its return placed it 27th out of 98 fund categories.

Of interest: The top absolute inflow category on a 1- and 3-month basis was Intermediate-Term Bond. This is consistent with the shift away from recent strength in the Ultrashort Bond category.

Equity

Bond

Other Taxable Bond

Balanced

Money Market

Alternative

Short-term

Long-term

1 month

3 months

6 months

1 year

3 years

5 years

10 years

15 years

Int-Term Bond $18.7B
(27/98)

Int-Term Bond $41.8B
(64/98)

Money Market $194.3B
(44/98)

Money Market $254.1B
(50/98)

Int-Term Bond $300.8B
(55/98)

Frgn. Large Blend $475.7B
(51/98)

Frgn. Large Blend $670.0B
(33/98)

Frgn. Large Blend $809.0B
(35/84)

Large Blend $16.5B
(34/98)

Money Market $31.2B
(92/98)

Large Blend $81.9B
(49/98)

Large Blend $114.1B
(4/98)

Large Blend $285.0B
(8/98)

Money Market $411.4B
(63/98)

Int-Term Bond $626.4B
(56/98)

Int-Term Bond $794.8B
(43/84)

Frgn. Large Blend $5.0B
(57/98)

Large Blend $25.6B
(21/98)

Ultrashort Bond $41.0B
(46/98)

Ultrashort Bond $79.2B
(46/98)

Frgn. Large Blend $273.7B
(37/98)

Int-Term Bond $402.4B
(42/98)

Large Blend $491.6B
(9/98)

Large Blend $576.9B
(9/84)

Muni National Int $4.6B
(42/98)

Diversified EM $18.5B
(29/98)

Diversified EM $24.2B
(36/98)

Frgn. Large Blend $57.8B
(73/98)

Money Market $270.6B
(68/98)

Large Blend $400.5B
(5/98)

Diversified EM $311.5B
(34/98)

Money Market $570.1B
(73/84)

Short-Term Bond $4.5B
(53/98)

High-Yield Bond $14.4B
(52/98)

Frgn. Large Blend $24.0B
(67/98)

Int-Term Bond $29.4B
(22/98)

Ultrashort Bond $146.6B
(73/98)

Ultrashort Bond $150.9B
(68/98)

Short-Term Bond $253.2B
(73/98)

Diversified EM $385.9B
(23/84)

Int Government $3.6B
(37/98)

Muni National Int $13.9B
(74/98)

Short Government $17.6B
(18/98)

Diversified EM $21.6B
(86/98)

Diversified EM $109.8B
(20/98)

Diversified EM $133.4B
(40/98)

Ultrashort Bond $213.2B
(81/98)

Short-Term Bond $247.5B
(62/84)

Ultrashort Bond $3.4B
(69/98)

World Bond $10.9B
(69/98)

Muni National Int $14.3B
(26/98)

Muni National Int $21.2B
(32/98)

Muni National Int $57.2B
(69/98)

Muni National Int $94.4B
(47/98)

World Bond $170.9B
(57/98)

World Bond $205.1B
(49/84)

High-Yield Bond $3.1B
(60/98)

Int Government $10.7B
(82/98)

Short-Term Bond $11.5B
(41/98)

Short Government $20.1B
(28/98)

Short-Term Bond $55.6B
(71/98)

Corporate Bond $74.7B
(57/98)

Muni National Int $120.5B
(60/98)

Ultrashort Bond $199.2B
(75/84)

World Bond $3.0B
(47/98)

Frgn. Large Blend $8.4B
(37/98)

Int-Term Bond $10.5B
(14/98)

Short-Term Bond $17.2B
(41/98)

World Bond $50.2B
(54/98)

World Bond $65.5B
(61/98)

Nontraditional Bond $103.2B
(64/98)

Muni National Int $138.1B
(46/84)

Diversified EM $2.5B
(39/98)

Corporate Bond $7.4B
(56/98)

Int Government $10.0B
(12/98)

Int Government $14.9B
(25/98)

Corporate Bond $45.6B
(62/98)

Short-Term Bond $63.4B
(60/98)

Corporate Bond $103.0B
(53/98)

Multisector Bond $124.9B
(31/84)

Source: Morningstar, Inc., as of March 31, 2019.

Notes: The above chart assumes that Morningstar balanced fund categories are aggregated. Money markets are also aggregated, inclusive of taxable, tax-exempt, and prime money market categories.

Cash laggards, absolute dollar flows, and returns, as of March 2019

How to read this table: The top left square tells you that Morningstar's Money Market category had the largest absolute outflow, while its return placed it 70th out of 98 fund categories.

Of interest: For the 1-month period, the Long Government category recorded the fifth-largest absolute outflow, even though it was one of the top performers, ranking 4th out of 98 categories.

Equity

Bond

Other Taxable Bond

Balanced

Money Market

Alternative


Short-term

Long-term

1 month

3 months

6 months

1 year

3 years

5 years

10 years

15 years

Money Market –$13.3B
(70/98)

Bank Loan –$10.8B
(62/98)

Bank Loan –$30.6B
(54/98)

Balanced –$40.0B
(20/98)

Large Growth –$184.0B
(3/98)

Large Growth –$254.5B
(2/98)

Money Market –$772.0B
(85/98)

Large Growth –$515.4B
(4/84)

Large Growth –$6.3B
(17/98)

Large Growth –$8.8B
(12/98)

Large Growth –$23.3B
(68/98)

Large Growth –$30.5B
(7/98)

Balanced –$66.6B
(31/98)

Mid-Cap Growth –$60.8B
(6/98)

Large Growth –$394.8B
(4/98)

Mid-Cap Growth –$95.2B
(3/84)

Bank Loan –$3.6B
(78/98)

Large Value –$8.2B
(28/98)

Balanced –$23.2B
(45/98)

Financial –$19.7B
(82/98)

Large Value –$43.5B
(18/98)

Large Value –$59.0B
(14/98)

Mid-Cap Growth –$75.4B
(3/98)

Small Growth –$49.3B
(8/84)

Japan Stock –$2.8B
(65/98)

Financial –$5.6B
(38/98)

Financial –$15.2B
(86/98)

Bank Loan –$17.8B
(54/98)

High-Yield Bond –$40.1B
(38/98)

High-Yield Bond –$58.1B
(53/98)

World Large Stock –$71.8B
(20/98)

Mid-Cap Value –$28.6B
(16/84)

Long Government –$2.6B
(4/98)

World Large Stock –$4.5B
(24/98)

Technology –$10.5B
(55/98)

Europe Stock –$17.6B
(79/98)

Mid-Cap Growth –$31.8B
(5/98)

Balanced –$46.9B
(25/98)

Small Growth –$37.7B
(7/98)

World Large Stock –$21.5B
(20/84)

Financial –$2.5B
(93/98)

Eq. Energy –$4.2B
(10/98)

Frgn. Large Value –$9.2B
(80/98)

Large Value –$16.1B
(27/98)

World Large Stock –$30.1B
(19/98)

Bank Loan –$39.0B
(62/98)

Mid-Cap Value –$29.2B
(16/98)

Muni NY Long –$7.7B
(52/84)

Balanced –$1.7B
(41/98)

Japan Stock –$4.2B
(48/98)

Nontraditional Bond –$9.0B
(50/98)

World Large Stock –$15.5B
(47/98)

Europe Stock –$27.2B
(45/98)

World Large Stock –$35.3B
(19/98)

Large Value –$25.1B
(14/98)

Muni Single St. Long –$6.4B
(61/84)

Large Value –$1.6B
(66/98)

Frgn. Large Value –$4.1B
(42/98)

Frgn. Large Growth –$8.5B
(62/98)

Mid-Cap Value –$12.7B
(56/98)

Mid-Cap Value –$19.9B
(23/98)

Small Growth –$33.8B
(9/98)

Trading-Levgd. Equity –$16.9B
(1/98)

Muni Single St. Int –$5.9B
(64/84)

Frgn. Large Growth –$1.6B
(24/98)

Balanced –$4.0B
(43/98)

World Large Stock –$7.8B
(63/98)

Frgn. Large Value –$11.9B
(83/98)

Health –$17.4B
(13/98)

Mid-Cap Value –$27.9B
(20/98)

Muni NY Long –$10.2B
(52/98)

Muni CA Long –$5.3B
(45/84)

Mid-Cap Value –$1.5B
(44/98)

Europe Stock –$2.7B
(35/98)

Multisector Bond –$7.5B
(38/98)

Multisector Bond –$9.5B
(43/98)

Frgn. Large Value –$16.8B
(34/98)

Long-Short Eq. –$21.1B
(72/98)

Muni Single St. Long –$6.0B
(67/98)

Muni PA –$3.3B
(59/84)

Source: Morningstar, Inc., as of March 31, 2019.

Notes: The above chart assumes that Morningstar balanced fund categories are aggregated. Money markets are also aggregated, inclusive of taxable, tax-exempt, and prime money market categories.

Flows by AUM percentage

The tables above provide detail on the largest flows from an absolute dollar perspective. Because large flows for categories with enormous existing AUM are common, it's important to keep an eye on flows as a percentage of AUM. The table below provides that narrower view.

Cash leaders and laggards by AUM percentage, as of March 2019

Leaders
1-month inflows 3-month inflows12-month inflows
Volatility24.3%Volatility79.3%Communications79.7%
Trading-Inverse Cmdty.17.9%Trading-Inverse Equity39.7%Volatility47.4%
Trading-Levgd. Debt11.9%Communications25.9%Ultrashort Bond47.0%
Communications 4.6% Trading-Levgd. Debt 13.8% Trading-Inverse Equity 42.8%
Trading-Inverse Equity 5.4% China Region 11.8% Long Government 37.2%

 

Laggards
1-month outflows3-month outflows12-month outflows
Single Currency–16.4%Trading-Levgd. Cmdty.–27.2%Trading-Inverse Debt–45.3%
Trading-Inverse Cmdty.–15.4%Single Currency–15.9%Cmdty. Ind. Metals–31.8%
Japan Stock–8.9%Cmdty. Energy–13.5%Managed Futures–28.1%
Cmdty. Energy –7.3% Japan Stock –13.4% Multicurrency –25.1%
Long Government –4.6% Trading-Inverse Debt –13.1% Financial –24.6%

Source: Vanguard calculations using data provided by Morningstar, Inc., as of March 31, 2019.

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 began publicly publishing in January 2017—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, Yan Zilbering, and Chris Celusniak of Vanguard Investment Strategy Group developed the risk speedometers, which are regularly updated by the Vanguard Advisor's Alpha® research team. The readings—which are simply the difference in net cash flow between higher-risk asset classes, such as stocks, and lower-risk asset classes, such as fixed income—gauge the level of risk investors are taking in a given period by comparing the current risk-taking with prior levels and longer-term averages.

One note of caution: While our readings are highly informative as to how cash flows are being invested in mutual funds and ETFs, we must remember that mutual funds and ETFs are not closed systems unto themselves. Rather, their flows are often also driven by cash flow from other assets within the much larger global capital market ecosystem.

For example, a large pension fund that manages a sizable bond mandate via a separately managed account could decide to liquidate that structure and move the assets into a bond ETF. This could result in a reading indicating a lower risk appetite in the mutual fund and ETF space when it is really just a substitution of a structure and not a reflection of risk appetite in the overall capital markets.

1 Cash flow data go back to 1993.

Notes:

  • All investing is subject to risk, including possible loss of principal.
  • Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
 

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