Risk speedometer: Easing off the brake

February 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 January, the 1-month risk speedometer continued to remain below its 5-year average, recording a score of –0.61 and landing slightly above the 25th percentile of rankings. Similarly, based on the 3- and 12-month speedometers, the appetite for risk remained low.

Vanguard's risk speedometers for January 2019

Risk speedometer January 2019 vs December 2018: 1 month endedRisk speedometer January 2019 vs October 2018: 3 months endedRisk speedometer January 2019 vs January 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 to the updating of the 5-year average.

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

General trends—Market returns and cash flows

U.S. equity funds and ETFs swung to a slight net outflow in January of $5.5 billion. This occurred despite a return of 8.6% for U.S. stocks, as represented by the CRSP US Total Market Index. Diving deeper, a new and notable shift occurred in U.S. equity ETFs, which lost $13.7 billion and ended a nine-month streak of net inflows. U.S. equity index funds led with strength, capturing $9.9 billion. Net outflows for U.S. equity active funds remained but leveled off, losing $1.7 billion.

Global equity markets rebounded in January, gaining 8.1%, as represented by the FTSE Global All Cap Index. Developed international equity funds and ETFs had net inflows of $2.3 billion. Here, too, ETFs offset the inflows, losing $2.9 billion, while index and active funds took in $3.0 billion and $2.2 billion, respectively. Of note, emerging markets funds and ETFs had strong net inflows, recording $11.8 billion, representing 2% of their base AUM.

U.S. taxable bond funds and ETFs were the clear area of strength in January flows, gaining $24.5 billion. Flows were strong across multiple product segments, with ETFs capturing $12.3 billion and both index and active funds scoring net inflows of $9.3 billion and $2.9 billion, respectively. Intermediate-Term Bond was the biggest driver in net inflows, capturing $7.5 billion. Ultrashort Bond continued to capture net inflows as well, $2.3 billion, marking its 30th consecutive month of net inflows. Given equities' strong performance in January, coupled with strong flows into bonds, investors are, perhaps, remaining disciplined and taking advantage of rebalancing opportunities. Net inflows for money markets abated in January, but still took in $3.8 billion. This lighter flow can be attributed to a slight uptick in January's risk.

A detailed look at cash flows and returns

While our risk speedometers offer a broad view of investor behavior, there is also 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 performance.

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

How to read this table: The top left square tells you that, in January, Morningstar's Diversified Emerging Market category had the largest absolute inflow, while its return placed it 25th out of 98 fund categories.

Of interest: Of the top ten categories for absolute inflows in January, nine were fixed income funds, despite strong monthly gains by U.S. and global equities.

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

Diversified EM $10.8B
(25/98)

Money Market $142.4B
(62/98)

Money Market $182.2B
(36/98)

Money Market $212.0B
(26/98)

Int-Term Bond $290.4B
(58/98)

Frgn. Large Blend $481.2B
(44/98)

Frgn. Large Blend $658.8B
(34/97)

Frgn. Large Blend $806.3B
(35/83)

Int-Term Bond $7.5B
(66/98)

Large Blend $40.3B
(27/98)

Large Blend $63.4B
(46/98)

Ultrashort Bond $85.4B
(23/98)

Frgn. Large Blend $281.2B
(35/98)

Large Blend $385.8B
(3/98)

Int-Term Bond $605.2B
(52/97)

Int-Term Bond $763.5B
(44/83)

High-Yield Bond $6.1B
(53/98)

Ultrashort Bond $24.8B
(64/98)

Ultrashort Bond $51.1B
(39/98)

Frgn. Large Blend $79.8B
(76/98)

Money Market $267.2B
(68/98)

Int-Term Bond $372.1B
(47/98)

Large Blend $437.9B
(8/97)

Large Blend $557.8B
(9/83)

Int Government $4.6B
(68/98)

Diversified EM $15.9B
(6/98)

Frgn. Large Blend $25.2B
(77/98)

Large Blend $60.1B
(39/98)

Large Blend $265.1B
(8/98)

Money Market $301.8B
(67/98)

Diversified EM $305.8B
(30/97)

Money Market $531.6B
(72/83)

Corporate Bond $4.0B
(57/98)

Short Government $14.8B
(20/98)

Diversified EM $18.9B
(56/98)

Diversified EM $20.8B
(83/98)

Ultrashort Bond $137.9B
(73/98)

Ultrashort Bond $148.6B
(70/98)

Short-term Bond $253.1B
(75/97)

Diversified EM $379.7B
(20/83)

Money Market $3.8B
(90/98)

Frgn. Large Blend $8.9B
(29/98)

Short Government $16.1B
(5/98)

Short Government $20.2B
(5/98)

Diversified EM $107.2B
(11/98)

Diversified EM $123.6B
(34/98)

Ultrashort Bond $209.9B
(80/97)

Short-term Bond $243.5B
(63/83)

Muni National Int $3.1B
(70/98)

Short-Term Bond $5.6B
(54/98)

Short-Term Bond $7.9B
(15/98)

Long Government $16.3B
(4/98)

Muni National Int $51.3B
(75/98)

Muni National Int $85.6B
(52/98)

World Bond $159.7B
(56/97)

World Bond $197.9B
(46/83)

World Bond $2.3B
(63/98)

Int Government $5.0B
(14/98)

Long Government $7.5B
(4/98)

Muni National Int $13.7B
(17/98)

Short-Term Bond $50.9B
(70/98)

Corporate Bond $72.8B
(63/98)

Muni National Int $111.7B
(58/97)

Ultrashort Bond $194.9B
(76/83)

Ultrashort Bond $2.3B
(86/98)

Long Government $3.6B
(4/98)

Health $5.5B
(48/98)

Small Blend $11.6B
(53/98)

Corporate Bond $50.1B
(62/98)

Short-Term Bond $61.5B
(64/98)

Nontraditional Bond $105.7B
(61/97)

Multisector Bond $127.4B
(47/83)

Short Government $2.3B
(88/98)

Cmdty Prec Metals $3.5B
(5/98)

Muni National Int $5.4B
(23/98)

Int Government $9.2B
(7/98)

Infl.-Protected Bond $42.4B
(59/98)

World Bond $58.1B
(60/98)

Corporate Bond $104.5B
(53/97)

Multisector Bond $121.5B
(57/83)

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

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

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

How to read this table: The top left square tells you that, in January, Morningstar's Bank Loan category had the largest absolute outflow, while its return placed it 58th out of 98 fund categories.

Of interest: For the one- and three-month periods, Bank Loan was the largest absolute outflow Morningstar 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

Bank Loan –$4.6B
(58/98)

Bank Loan –$24.6B
(84/98)

Balanced –$25.5B
(50/98)

Balanced –$43.1B
(47/98)

Large Growth –$184.1B
(4/98)

Large Growth –$242.4B
(2/98)

Money Market –$867.7B
(86/97)

Large Growth –$507.0B
(4/83)

Large Value –$4.1B
(35/98)

Int-Term Bond –$18.4B
(21/98)

Bank Loan –$21.7B
(49/98)

High-Yield Bond –$31.1B
(40/98)

Balanced –$66.5B
(33/98)

High-Yield Bond –$62.4B
(54/98)

Large Growth –$396.5B
(4/97)

Mid-Cap Growth –$93.8B
(3/83)

Eq. Energy –$3.4B
(6/98)

Balanced –$16.0B
(47/98)

Large Growth –$20.8B
(61/98)

Large Growth –$30.0B
(42/98)

Large Value –$35.5B
(15/98)

Mid-Cap Growth –$56.9B
(6/98)

Mid-Cap Growth –$76.3B
(5/97)

Small Growth –$49.0B
(10/83)

Technology –$2.0B
(16/98)

Large Growth –$11.5B
(59/98)

Int-Term Bond –$15.9B
(8/98)

Large Value –$19.2B
(60/98)

Mid-Cap Growth –$33.4B
(6/98)

Large Value –$51.2B
(12/98)

World Large Stock –$74.7B
(20/97)

Mid-Cap Value –$22.3B
(17/83)

Balanced –$1.8B
(45/98)

Multisector Bond –$10.0B
(48/98)

Multisector Bond –$14.2B
(24/98)

Europe Stock –$18.1B
(90/98)

High-Yield Bond –$33.2B
(40/98)

Balanced –$36.5B
(25/98)

Small Growth –$38.5B
(6/97)

World Large Stock –$15.5B
(22/83)

Financial –$1.8B
(18/98)

Financial –$8.5B
(83/98)

High-Yield Bond –$13.1B
(44/98)

Mid-Cap Value –$13.5B
(64/98)

Europe Stock –$30.8B
(52/98)

Small Growth –$33.9B
(13/98)

Mid-Cap Value –$28.8B
(17/97)

Muni NY Long –$7.9B
(53/83)

Trading-Levgd. Equity –$1.6B
(2/98)

Technology –$8.4B
(65/98)

Technology –$12.9B
(68/98)

Financial –$11.1B
(52/98)

World Large Stock –$28.0B
(22/98)

World Large Stock –$30.0B
(18/98)

Large Value –$26.7B
(18/97)

Muni Single St. Long –$6.7B
(62/83)

Large Growth –$1.0B
(21/98)

Frgn. Large Growth –$6.8B
(40/98)

Financial –$12.3B
(87/98)

Multisector Bond –$12.5B
(3/98)

Health –$25.3B
(21/98)

Bank Loan –$28.0B
(68/98)

Trading-Levgd. Equity –$13.6B
(1/97)

Muni CA Long –$6.2B
(48/83)

Industrials –$1.0B
(23/98)

High-Yield Bond –$6.3B
(63/98)

World Large Stock –$7.5B
(71/98)

World Large Stock –$10.6B
(62/98)

Mid-Cap Value –$18.0B
(16/98)

Mid-Cap Value –$26.7B
(17/98)

Muni NY Long –$10.4B
(51/97)

Muni Single St. Int –$6.0B
(66/83)

Europe Stock –$1.0B
(41/98)

Nontraditional Bond –$6.2B
(68/98)

Long-Short Eq. –$7.3B
(66/98)

Real Estate –$9.5B
(1/98)

Frgn. Large Value –$14.4B
(29/98)

Long-Short Eq. –$15.3B
(73/98)

Muni Single St. Long –$6.0B
(68/97)

Muni PA –$3.6B
(60/83)

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

Notes: The above chart assumes that Morningstar balanced fund categories are aggregated. Money markets are also aggregated, inclusive of taxable, tax-free, 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 January 2019

Leaders
1-month inflows 3-month inflows12-month inflows
Trading-Inverse Equity28.4%Trading-Levgd. Cmdty.33.5%Ultrashort Bond54.2%
Trading-Levgd. Debt21.1%Short Government24.9%Communications53.6%
Volatility17.7%Trading-Levgd. Debt21.4%Long Government45.0%
Communications 10.7% Single Currency 18.7% Short Government 37.3%
Single Currency 7.3% Trading-Inverse Equity 17.5% Trading-Levgd. Debt 32.8%

 

Laggards
1-month outflows3-month outflows12-month outflows
Eq. Energy–9.1%Trading-Inverse Cmdty.–40.5%Trading-Inverse Debt–39.3%
Trading-Levgd. Equity–7.1%Volatility–20.1%Trading-Inverse Cmdty.–31.8%
Multicurrency–5.8%Bank Loan–16.2%Cmdty. Ind. Metals–28.9%
Long-Short Credit –4.0% Trading-Inverse Debt –14.8% Multicurrency –23.6%
Industrials –3.6% Long-Short Eq. –14.8% Cmdty. Energy –22.1%

Source: Vanguard calculations using data provided by Morningstar, Inc., as of January 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 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 was 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.

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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