Risk speedometer: Risk deceleration

January 30, 2019

 

Vanguard's risk speedometers are not intended as tactical tools for portfolio implementation. Rather, they are intended to inform you of industry trends so you can proactively have effective client conversations. 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 coaching.

In December, the 1-month risk speedometer continued to remain well below its 5-year average, recording a score of –1.54 and landing in the bottom seventh percentile of rankings. Similarly, on a 3- and 12-month basis, risk appetite was near its lows.

Vanguard's risk speedometers for December 2018

Risk speedometer December 2018 vs November 2018: 1 month endedRisk speedometer December 2018 vs September 2018: 3 months endedRisk speedometer December 2018 vs December 2017: 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 December 31, 2018.

General trends—Market returns and cash flows

U.S. equity funds and ETFs captured net inflows in December of $14.1 billion. These flows would suggest counter-cyclical behavior in light of the worst December on record2 for U.S. equities, losing 9.3%, as represented by the CRSP US Total Market Index. On closer examination, U.S. equity ETFs remained the story, capturing $23.3 billion for the month and finishing the year with a total haul of $143 billion. Similarly, U.S. equity index funds also exhibited strength in December, capturing $22.3 billion. U.S. equity active funds continued to be the offsetting driver, recording redemptions of $31.5 billion and continuing the trend marking their 57th consecutive month of net outflows.

Global equity markets also experienced pressure in December, losing 7.2%, as represented by the FTSE Global All Cap Index. Developed international equity funds and ETFs lost $11.6 billion, while those in emerging markets also had net outflows of $1.5 billion. Combining U.S. and ex-U.S. equity, flows remained de minimis in net inflows.

U.S. taxable bond funds and ETFs also had redemptions in December, losing $3.1 billion. ETFs also remained the story, capturing $19.8 billion. Index and active bond funds offset the ETFs, losing $9.5 billion and $13.3 billion, respectively. Ultra-short-term and short-term government bonds were again the biggest winners, gaining $9.3 billion and $6.8 billion, respectively. Ultra-short-term bond net inflows marked their 29th consecutive month of net inflows, while short-term government bond net inflows represented 15% of their starting assets under management. Tax-exempt bond funds and ETFs recorded modest net inflows of $0.2 billion. Money markets had another large net inflow month, capturing $57.3 billion, bringing the total for 2018 to $161.6 billion.

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 December 2018

How to read this table: The top left square tells you that, in December, Morningstar's Money Market category had the largest absolute inflow, while its return placed it 34th out of 98 fund categories.

Of interest: The Money Market category was the largest absolute inflow category for 2018 as it ranked ninth-best in performance.

Equity

Bond

Other Taxable Bond

Balanced

Money Market

Alternative

Top Winning Trends

Short-term

Long-term

1 month

3 months

6 months

1 year

3 years

5 years

10 years

15 years

Money Market $57.3B
(34/98)

Money Market $159.3B
(34/98)

Money Market $192.9B
(15/98)

Money Market $161.6B
(9/98)

Frgn. Large Blend $292.7B
(40/98)

Frgn. Large Blend $487.8B
(68/98)

Frgn. Large Blend $657.1B
(37/97)

Frgn. Large Blend $807.1B
(35/83)

Large Blend $27.4B
(82/98)

Large Blend $56.3B
(62/98)

Large Blend $69.1B
(50/98)

Large Blend $91.6B
(37/98)

Int-Term Bond $283.6B
(45/98)

Large Blend $374.2B
(5/98)

Int-Term Bond $602.8B
(47/97)

Int-Term Bond $755.6B
(42/83)

Ultrashort Bond $9.3B
(37/98)

Ultrashort Bond $33.8B
(36/98)

Ultrashort Bond $55.5B
(27/98)

Frgn. Large Blend $90.9B
(76/98)

Large Blend $276.0B
(5/98)

Int-Term Bond $358.9B
(38/98)

Large Blend $438.3B
(8/97)

Large Blend $565.0B
(9/83)

Short Government $6.8B
(24/98)

Frgn. Large Blend $16.0B
(63/98)

Frgn. Large Blend $28.5B
(71/98)

Ultrashort Bond $87.4B
(10/98)

Money Market $238.6B
(52/98)

Money Market $287.5B
(55/98)

Diversified EM $295.5B
(33/97)

Money Market $502.2B
(72/83)

Frgn. Large Blend $4.8B
(61/98)

Short Government $14.4B
(9/98)

Short Government $14.3B
(6/98)

Int-Term Bond $23.6B
(22/98)

Ultrashort Bond $139.8B
(66/98)

Ultrashort Bond $146.4B
(61/98)

Short-term Bond $254.2B
(71/97)

Diversified EM $370.6B
(20/83)

Large Value $3.5B
(85/98)

Large Value $7.5B
(65/98)

Diversified EM $8.8B
(63/98)

Diversified EM $23.6B
(79/98)

Diversified EM $94.6B
(11/98)

Diversified EM $106.2B
(63/98)

Ultrashort Bond $207.9B
(78/97)

Short-term Bond $243.7B
(63/83)

Short-Term Bond $3.1B
(30/98)

Diversified EM $5.8B
(57/98)

Long Government $8.3B
(5/98)

Short Government $18.0B
(5/98)

Muni National Int $50.5B
(63/98)

Muni National Int $82.7B
(39/98)

World Bond $157.2B
(64/97)

World Bond $196.1B
(48/83)

EM Bond $2.1B
(60/98)

Trading-Levgd. Equity $4.3B
(96/98)

Short-Term Bond $7.5B
(14/98)

Muni National Int $16.6B
(24/98)

Short-Term Bond $50.3B
(60/98)

Corporate Bond $68.5B
(50/98)

Muni National Int $109.4B
(54/97)

Ultrashort Bond $192.2B
(75/83)

Cmdty Prec Metals $1.9B
(8/98)

Short-Term Bond $4.1B
(33/98)

Health $7.4B
(47/98)

Long Government $14.9B
(18/98)

Corporate Bond $46.1B
(56/98)

Short-Term Bond $63.6B
(54/98)

Nontraditional Bond $106.0B
(63/97)

Multisector Bond $123.5B
(45/83)

Muni National Short $1.7B
(32/98)

Cmdty Prec Metals $2.7B
(7/98)

EM Bond $5.1B
(58/98)

World Bond $11.0B
(12/98)

Infl.-Protected Bond $40.4B
(47/98)

World Bond $56.8B
(56/98)

Corporate Bond $103.4B
(53/97)

Multisector Bond $122.6B
(30/83)

Source: Morningstar, Inc., as of December 31, 2018.

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 December 2018

How to read this table: The top left square tells you that, in December, Morningstar's Intermediate-Term Bond category had the largest absolute outflow, while its return placed it 11th out of 98 fund categories.

Of interest: For the 10-year period, the Money Market category was the largest absolute category outflow, losing $742.7 billion, despite the more recent trend of being a top absolute asset gatherer over the prior 12 months.

Equity

Bond

Other Taxable Bond

Balanced

Money Market

Alternative


Top Losing Trends

Short-term

Long-term

1 month

3 months

6 months

1 year

3 years

5 years

10 years

15 years

Int-Term Bond –$17.0B
(11/98)

Int-Term Bond –$31.2B
(13/98)

Balanced –$24.7B
(48/98)

Balanced –$41.3B
(44/98)

Large Growth –$190.4B
(4/98)

Large Growth –$243.4B
(2/98)

Money Market –$742.7B
(83/97)

Large Growth –$506.0B
(4/83)

Bank Loan –$15.0B
(45/98)

Balanced –$20.0B
(56/98)

Large Growth –$22.8B
(65/98)

High-Yield Bond –$40.6B
(41/98)

Balanced –$68.7B
(26/98)

High-Yield Bond –$69.8B
(53/98)

Large Growth –$397.8B
(3/97)

Mid-Cap Growth –$93.4B
(3/83)

Balanced –$9.8B
(54/98)

Bank Loan –$19.8B
(45/98)

Int-Term Bond –$19.4B
(8/98)

Large Growth –$29.4B
(36/98)

High-Yield Bond –$42.9B
(30/98)

Mid-Cap Growth –$56.7B
(7/98)

Mid-Cap Growth –$76.4B
(4/97)

Small Growth –$46.2B
(11/83)

High-Yield Bond –$8.1B
(47/98)

High-Yield Bond –$19.3B
(48/98)

High-Yield Bond –$17.5B
(45/98)

Large Value –$21.0B
(57/98)

Mid-Cap Growth –$36.7B
(8/98)

Large Value –$47.1B
(11/98)

World Large Stock –$70.1B
(20/97)

Mid-Cap Value –$19.3B
(18/83)

Multisector Bond –$7.8B
(36/98)

Large Growth –$14.4B
(79/98)

Multisector Bond –$16.3B
(35/98)

Europe Stock –$16.0B
(84/98)

Large Value –$36.2B
(14/98)

Small Growth –$33.0B
(15/98)

Small Growth –$37.7B
(7/97)

World Large Stock –$8.0B
(21/83)

Large Growth –$7.0B
(79/98)

Multisector Bond –$13.8B
(42/98)

Bank Loan –$15.7B
(41/98)

Mid-Cap Value –$14.7B
(70/98)

Europe Stock –$30.2B
(83/98)

Balanced –$30.6B
(27/98)

Mid-Cap Value –$28.1B
(15/97)

Muni NY Long –$8.0B
(54/83)

Frgn. Large Growth –$5.7B
(59/98)

Financial –$9.6B
(77/98)

Financial –$11.0B
(80/98)

Real Estate –$11.1B
(52/98)

Health –$28.0B
(43/98)

World Large Stock –$26.0B
(24/98)

Large Value –$22.2B
(16/97)

Muni Single St. Long –$6.9B
(61/83)

Financial –$5.2B
(94/98)

Technology –$9.5B
(88/98)

World Large Stock –$9.5B
(67/98)

Multisector Bond –$11.1B
(4/98)

World Large Stock –$27.6B
(21/98)

Mid-Cap Value –$25.7B
(23/98)

Trading-Levgd. Equity –$10.6B
(2/97)

Muni CA Long –$6.5B
(47/83)

World Bond –$4.6B
(33/98)

World Bond –$7.4B
(25/98)

Technology –$8.0B
(74/98)

Financial –$10.0B
(81/98)

Mid-Cap Value –$18.5B
(20/98)

Bank Loan –$19.2B
(59/98)

Muni NY Long –$10.4B
(43/97)

Muni Single St. Int –$6.1B
(66/83)

Nontraditional Bond –$4.0B
(40/98)

Corporate Bond –$7.2B
(38/98)

Long-Short Eq. –$7.7B
(56/98)

World Large Stock –$9.5B
(60/98)

Frgn. Large Value –$13.9B
(37/98)

Long-Short Eq. –$11.9B
(75/98)

Muni Single St. Long –$6.2B
(60/97)

Muni National Long –$3.7B
(32/83)

Source: Morningstar, Inc., as of December 31, 2018.

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 December 2018

Leaders
1-month inflows 3-month inflows12-month inflows
Short Government14.9%Trading-Levgd. Cmdty.41.7%Long Government53.5%
Trading-Levgd. Cmdty.12.6%Short Government31.1%Trading-Levgd. Debt52.7%
Single Currency7.8%Trading-Levgd. Debt19.5%Ultrashort Bond44.2%
Trading-Levgd. Debt 7.3% Trading-Levgd. Equity 14.8% Short Government 40.9%
Cmdty. Prec. Metals 5.6% Ultrashort Bond 14.4% China Region 39.6%

 

Laggards
1-month outflows3-month outflows12-month outflows
Trading-Inverse Cmdty.–70.2%Volatility–68.7%Trading-Inverse Debt–36.0%
Volatility–33.5%Trading-Inverse Cmdty.–44.4%Cmdty. Energy–33.5%
Trading-Inverse Debt–10.9%Trading-Inverse Equity–20.2%Long-Short Credit–24.8%
Bank Loan –10.0% Trading-Inverse Debt –17.6% India Equity –23.7%
Cmdty. Agriculture –7.8% Preferred Stock –15.1% Cmdty. Ind. Metals –21.3%

Source: Vanguard calculations using data provided by Morningstar, Inc., as of December 31, 2018.

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, and 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.

2 Cash flow data goes 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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