Risk speedometer: Holding steady at lower bound

August 28, 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 July, the 1-month risk speedometer experienced further pressure, pushing the reading to the bottom decile of rankings. In addition, this trend of lower risk was observed for the 3- and 12-month readings, which also landed in the bottom decile. Over the last 15 years, simultaneous bottom-decile readings across these time frames have only occurred 4% of the time.

Vanguard's risk speedometers for July 2019

Risk speedometer July 2019 vs June 2019: 1 month endedRisk speedometer July 2019 vs April 2019: 3 months endedRisk speedometer July 2019 vs July 2018: 12 months ended

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

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 five-year average.

General trends—Market returns and cash flows

U.S. equity funds and ETFs suffered net cash outflows of $17 billion in July. Net outflows in active equity totaled $23.5 billion, marking the 64th consecutive month of redemptions in the category. Large Growth in the active space was the primary driver of the outflows. Index funds experienced small net outflows of $1.6 billion, while ETFs once more were the story, capturing $8.2 billion. At the U.S. equity category level across all product types, Large Blend remained the only positive asset gatherer for the six months ended July 31.

Global equity markets, as represented by the FTSE Global All Cap Index, were mostly flat for July, gaining just 0.31%. Given the flat performance, net outflows for Developed International and Emerging Markets equities were not a surprise, with the categories losing $1.8 billion and $2.1 billion, respectively.

Taxable bond funds and ETFs again had large net inflows, capturing $25.4 billion. Cash flows were positive among all product types, with active funds accounting for more than half the total. Cash flows were primarily anchored in the intermediate-term duration category, with Intermediate Core Bond and Intermediate Government gaining $12.3 billion and $4.7 billion, respectively. Long-Term Bond and Long Government suffered slight outflows of $0.3 billion and $1.7 billion, respectively. Ultrashort Bond had positive net cash flows for the 36th consecutive month.

The Money Market category was also strong and continued to be the main driver for lower-orbit risk readings for the 12 months ended July 31. The category took in $75.7 billion in July, or 2.4% of its starting assets under management. Money Market net inflows for the 12-month period totaled $400.2 billion.

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 July 2019

How to read this table: The top left square tells you that Morningstar's Money Market category had the largest absolute inflow, while its returns placed it 66th out of 103 fund categories.

Of interest: The Money Market category ranked as the absolute top asset gatherer for the five-year period, with a relative performance ranking in the bottom half of all 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 $75.7B
(66/103)

Money Market $202.0B
(70/103)

Money Market $213.3B
(88/103)

Money Market $400.2B
(61/103)

Money Market $506.8B
(77/103)

Money Market $686.1B
(68/103)

Frgn. Large Blend $662.1B
(39/101)

Frgn. Large Blend $787.5B
(36/88)

Int Core Bond $12.3B
(61/103)

Int Core Bond $23.9B
(17/103)

Int Core Bond $58.4B
(36/103)

Large Blend $140.9B
(12/103)

Large Blend $324.2B
(7/103)

Frgn. Large Blend $464.3B
(62/103)

Large Blend $560.1B
(7/101)

Money Market $752.3B
(78/88)

Large Blend $9.4B
(15/103)

Int Core-Plus Bond $20.0B
(19/103)

Large Blend $48.7B
(14/103)

Ultrashort Bond $70.3B
(59/103)

Frgn. Large Blend $262.9B
(30/103)

Large Blend $449.6B
(6/103)

Int Core Bond $473.8B
(48/101)

Large Blend $643.0B
(8/88)

Int Core-Plus Bond $9.0B
(62/103)

Frgn. Large Blend $15.1B
(83/103)

Int Core-Plus Bond $40.8B
(46/103)

Int Core Bond $49.2B
(13/103)

Int Core Bond $221.1B
(50/103)

Int Core Bond $345.0B
(32/103)

Diversified EM $296.6B
(45/101)

Int Core Bond $559.3B
(51/88)

Int Government $4.7B
(73/103)

Ultrashort Bond $12.2B
(71/103)

Muni National Int $23.8B
(51/103)

Frgn. Large Blend $38.4B
(79/103)

Ultrashort Bond $162.2B
(75/103)

Ultrashort Bond $163.2B
(71/103)

Short-Term Bond $242.6B
(72/101)

Diversified EM $383.4B
(21/88)

High-Yield Bond $4.2B
(57/103)

Large Blend $11.7B
(46/103)

Int Government $19.6B
(62/103)

Int Core-Plus Bond $37.0B
(19/103)

Diversified EM $98.8B
(23/103)

World Bond-USD Hdg $126.0B
(47/103)

Ultrashort Bond $223.6B
(79/101)

Int Core-Plus Bond $298.0B
(40/88)

Short-Term Bond $4.2B
(68/103)

Int Government $10.5B
(30/103)

Ultrashort Bond $19.4B
(86/103)

Muni National Int $27.7B
(34/103)

Int Core-Plus Bond $97.3B
(52/103)

Diversified EM $111.9B
(65/103)

Int Core-Plus Bond $179.6B
(44/101)

Short-Term Bond $253.5B
(65/88)

Muni National Int $4.1B
(36/103)

Muni National Int $9.6B
(35/103)

World Bond-USD Hdg $17.5B
(40/103)

Diversified EM $25.5B
(74/103)

World Bond-USD Hdg $86.1B
(71/103)

Int Core-Plus Bond $109.7B
(42/103)

World Bond-USD Hdg $163.8B
(62/101)

Ultrashort Bond $213.9B
(84/88)

Frgn. Large Blend $3.5B
(93/103)

Short-Term Bond $9.0B
(51/103)

Short-Term Bond $17.3B
(70/103)

Short-Term Bond $24.7B
(45/103)

Short-Term Bond $58.4B
(70/103)

Muni National Int $98.6B
(44/103)

Muni National Int $123.6B
(56/101)

World Bond-USD Hdg $166.6B
(52/88)

Multisector Bond $3.4B
(58/103)

Multisector Bond $8.6B
(41/103)

Multisector Bond $16.7B
(53/103)

Int Government $23.9B
(21/103)

Muni National Int $57.0B
(69/103)

Corporate Bond $66.5B
(55/103)

Nontraditional Bond $100.9B
(71/101)

Muni National Int $146.6B
(45/88)

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

Notes: The above chart assumes that all Morningstar allocation fund categories are aggregated into one broad Balanced category and that all Morningstar Money Market categories are aggregated into one broad category. Fund cash-flow information excludes data for funds of funds.

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

How to read this table: The top left square tells you that Morningstar's Large Growth category had the largest absolute outflow, while its return placed it 16th out of 103 fund categories.

Of interest: Large Growth was the number one laggard over all periods, except for the 1-year period, where it was number two, despite having top relative performance.

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

Large Growth –$10.9B
(16/103)

Large Growth –$17.9B
(50/103)

Large Growth –$27.1B
(8/103)

Balanced –$66.6B
(43/103)

Large Growth –$157.0B
(3/103)

Large Growth –$253.3B
(3/103)

Large Growth –$411.9B
(5/101)

Large Growth –$524.3B
(4/88)

Large Value –$8.8B
(18/103)

Balanced –$9.2B
(53/103)

Balanced –$20.2B
(30/103)

Large Growth –$47.8B
(16/103)

Balanced –$127.0B
(25/103)

Balanced –$165.7B
(24/103)

Money Market –$382.0B
(83/101)

Mid-Cap Growth –$85.6B
(3/88)

Bank Loan –$2.7B
(53/103)

Bank Loan –$9.2B
(76/103)

Bank Loan –$18.3B
(74/103)

Bank Loan –$40.0B
(65/103)

Large Value –$71.3B
(16/103)

Large Value –$98.9B
(15/103)

World Large Stock –$81.1B
(21/101)

Small Growth –$52.4B
(5/88)

Health –$2.5B
(79/103)

Large Value –$8.5B
(63/103)

Large Value –$16.5B
(25/103)

Large Value –$18.8B
(55/103)

High-Yield Bond –$38.7B
(34/103)

World Bond –$57.7B
(73/103)

Mid-Cap Growth –$71.8B
(4/101)

Mid-Cap Value –$32.6B
(17/88)

Europe Stock –$2.5B
(97/103)

Health –$5.6B
(16/103)

Frgn. Large Value –$10.2B
(90/103)

Financial –$16.2B
(76/103)

World Large Stock –$27.5B
(14/103)

Mid-Cap Growth –$52.5B
(5/103)

Large Value –$51.3B
(14/101)

World Large Stock –$26.8B
(20/88)

Mid-Cap Value –$2.3B
(26/103)

Europe Stock –$4.1B
(93/103)

Health –$9.4B
(80/103)

Frgn. Large Value –$16.0B
(89/103)

Mid-Cap Value –$26.3B
(21/103)

High-Yield Bond –$48.6B
(45/103)

Small Growth –$44.0B
(8/101)

Muni NY Long –$6.9B
(54/88)

Mid-Cap Growth –$1.9B
(11/103)

China Region –$3.7B
(96/103)

World Large Stock –$8.5B
(24/103)

World Large Stock –$15.7B
(63/103)

Mid-Cap Growth –$23.9B
(4/103)

Bank Loan –$43.2B
(64/103)

Mid-Cap Value –$26.5B
(15/101)

Muni Single St. Int –$4.9B
(71/88)

Balanced –$1.8B
(54/103)

Mid-Cap Value –$3.6B
(74/103)

Mid-Cap Value –$6.9B
(28/103)

Mid-Cap Value –$15.1B
(73/103)

Health –$23.7B
(24/103)

World Large Stock –$39.9B
(20/103)

Trading-Levgd. Equity –$14.9B
(1/101)

Health –$4.8B
(2/88)

Global Real Estate –$1.8B
(75/103)

Trading-Levgd. Equity –$3.4B
(13/103)

Frgn. Large Growth –$5.8B
(18/103)

Frgn. Large Growth –$13.7B
(71/103)

World Bond –$21.7B
(46/103)

Mid-Cap Value –$35.0B
(19/103)

Muni NY Long –$10.4B
(43/101)

Muni CA Long –$4.6B
(66/88)

Long Government –$1.7B
(69/103)

Frgn. Large Value –$3.2B
(94/103)

Japan Stock –$5.7B
(85/103)

Europe Stock –$12.6B
(83/103)

Frgn. Large Value –$19.8B
(31/103)

Small Growth –$29.6B
(8/103)

Muni Single St. Long –$5.6B
(66/101)

Muni PA –$3.3B
(57/88)

Source: Morningstar, Inc., as of July 2019.

Notes: The above chart assumes that all Morningstar allocation fund categories are aggregated into one broad Balanced category and that all Morningstar Money Market categories are aggregated into one broad category. Fund cash-flow information excludes data for funds of funds.

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 July 2019

Leaders
1-month inflows 3-month inflows12-month inflows
Volatility25.4%Trading-Inverse Cmdty22.9%Communications74.6%
Trading-Inverse Cmdty7.1%Trading-Inverse Equity17.4%Target Maturity58.6%
Trading-Inverse Equity5.9%Cmdty Prec. Metals10.4%Volatility55.2%
Trading-Misc. 5.5% Trading-Misc. 9.9% Trading-Inverse Equity 49.2%
Cmdty Prec Metals 4.4% Trading-Levgd. Debt 8.6% Ultrashort Bond 37.0%

 

Laggards
1-month outflows3-month outflows12-month outflows
Trading-Levgd. Debt–10.5%Trading-Inverse Cmdty–33.8%Trading-Inverse Debt–35.8%
Cmdty Energy–6.7%Cmdty Ind. Metals–14.6%Cmdty Ind. Metals–32.8%
Europe Stock–4.5%China Region–12.2%Long-Short Eq.–30.0%
Trading-Levgd Equity –4.2% Trading-Levgd Equity –11.4% Managed Futures –29.2%
Cmdty Agriculture –3.6% Long-Short Eq. –9.2% Long-Short Credit –27.5%

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. Our risk speedometers—our unique lens on investor behavior that we began 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.

The Vanguard Advisor's Alpha® research team developed and regularly updates the risk speedometers. 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 According to data from Morningstar, Inc., assets under management for U.S. open-end mutual funds, money market funds, and ETFs totaled $20.0 trillion as of December 31, 2018. 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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