Risk speedometer: Risk appetite remains anchored at low level

July 24, 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 June, the 1-month risk speedometer improved moderately. But uncertainty remained, and risk was anchored at lower levels. June marked the 14th consecutive 1-month risk speedometer that was below the 5-year historical average. The 3- and 12-month readings declined notably, landing in the bottom 25th percentile of rankings.

Vanguard's risk speedometers for June 2019

Risk speedometer June 2019 vs May 2019: 1 month endedRisk speedometer June 2019 vs March 2019: 3 months endedRisk speedometer June 2019 vs June 2018: 12 months ended

Source: Vanguard calculations, using data provided by Morningstar, Inc., as of June 30, 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 had moderate net cash inflows of $9.3 billion in June. ETFs were the story and dominated the category, capturing $28.5 billion, or more than 2.5% of their starting AUM. A third of the ETF net cash flow was attributable to iShares Russell 1000 Value and iShares Russell 1000 Growth ETFs, which captured $5.0 billion and $4.0 billion, respectively. Index equity funds gathered $1.0 billion, while net active equity outflows persisted, losing $20.2 billion and marking their 63rd consecutive month of net redemptions.

Global equity markets returned 6.5% in June, as represented by the FTSE Global All Cap Index, recouping May's loss. Despite June's strength, developed international equity funds and ETFs lost $3.9 billion. Net active equity redemptions were the primary driver, losing $7.8 billion, while ETFs and index equity captured $1.1 billion and $2.8 billion in net inflows, respectively. Emerging markets funds and ETFs marked their second consecutive month of net redemptions, shedding $1.6 billion.

Taxable bond funds and ETFs continued to command strong net inflows, with investors adding $28.5 billion. Net flows remained positive across all product segments, with ETFs again dominating the category, capturing $20.0 billion. Intermediate Core Bond and Corporate Bond categories were the largest drivers, adding $6.7 billion and $5.9 billion, respectively. Ultrashort Bond was a close third, gaining $5.8 billion and marking the 35th consecutive month of net inflows for the category.

The Money Market category continued to have net inflows, capturing $37.4 billion, or 1.2% of its starting AUM. This monthly flow is more in line with recent trends and flow data we've observed. Given the lesser magnitude of flows into money markets and some strength into equities, we are left with a moderate 1-month improvement in risk.

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 June 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 return placed it 96th out of 103 fund categories.

Of interest: Despite impressive returns for global equity markets since January 1 (+16.3%), as represented by the FTSE Global All Cap Index, the top two absolute inflow categories suggest that investors were anchored to a low-risk appetite over the 1-, 3-, and 6-month periods.

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 $37.4B
(96/103)

Money Market $110.9B
(86/103)

Money Market $142.1B
(97/103)

Money Market $337.8B
(67/103)

Money Market $444.7B
(76/103)

Money Market $588.6B
(66/103)

Frgn. Large Blend
$651.8B
(35/101)

Frgn. Large Blend $787.0B
(37/88)

Int Core Bond
$6.7B
(68/103)

Int Core Bond $32.0B
(32/103)

Int Core Bond $59.9B
(62/103)

Large Blend $136.7B
(8/103)

Large Blend $329.0B
(8/103)

Frgn. Large Blend $463.4B
(63/103)

Large Blend $552.4B
(7/101)

Money Market $674.4B
(78/88)

Corporate Bond
$5.9B
(54/103)

Int Core Bond $19.4B
(33/103)

Large Blend $38.7B
(18/103)

Ultrashort Bond $74.1B
(66/103)

Frgn. Large Blend $261.7B
(27/103)

Large Blend $450.2B
(6/103)

Int Core Bond $473.6B
(53/101)

Large Blend $633.9B
(9/88)

Ultrashort Bond
$5.8B
(93/103)

Ultrashort Bond $11.6B
(85/103)

Int Core-Plus Bond $32.1B
(61/103)

Int Core Bond $45.2B
(18/103)

Int Core Bond $224.9B
(54/103)

Int Core Bond $343.8B
(37/103)

Diversified EM $301.1B
(41/101)

Int Core Bond $553.2B
(51/88)

Int Core-Plus Bond $4.9B
(65/103)

Large Blend $11.4B
(19/103)

Muni National Int $22.7B
(75/103)

Frgn. Large Blend $39.8B
(76/103)

Ultrashort Bond $158.9B
(72/103)

Ultrashort Bond $162.7B
(68/103)

Short-Term Bond
$244.4B
(75/101)

Diversified EM $384.5B
(18/88)

Int Government $4.5B
(72/103)

Muni National Int $8.9B
(61/103)

Int Government $19.5B
(77/103)

Int Core-Plus Bond $30.4B
(20/103)

Diversified EM $106.4B
(21/103)

World Bond-USD Hdg $125.1B
(47/103)

Ultrashort Bond
$221.5B
(80/101)

Int Core-Plus Bond $290.0B
(40/88)

High-Yield Bond
$4.1B
(55/103)

Int Government $8.8B
(49/103)

Diversified EM
$18.8B
(38/103)

Diversified EM $27.1B
(64/103)

Int Core-Plus Bond $93.3B
(50/103)

Diversified EM $118.2B
(56/103)

Int Core-Plus Bond
$177.8B
(45/101)

Short-Term Bond $250.2B
(65/88)

Large Blend $3.2B
(18/103)

Multisector Bond $8.2B
(41/103)

Ultrashort Bond $18.5B
(95/103)

Muni National Int $26.6B
(40/103)

World Bond-USD Hdg $85.4B
(71/103)

Int Core-Plus Bond $104.3B
(43/103)

World Bond-USD Hdg $161.9B
(62/101)

Ultrashort Bond $210.6B
(83/88)

Frgn. Large Blend
$3.0B
(28/103)

Long Government $7.6B
(12/103)

World Bond-USD Hdg
$18.5B
(67/103)

World Bond-USD Hdg $21.8B
(50/103)

Short-Term Bond $56.8B
(66/103)

Muni National Int $97.0B
(45/103)

Muni National Int
$121.8B
(58/101)

World Bond-USD Hdg $164.6B
(52/88)

World Bond-USD Hdg
$2.7B
(61/103)

World Bond-USD Hdg
$7.3B
(40/103)

High-Yield Bond $14.8B
(52/103)

Short-Term Bond $20.60B
(52/103)

Muni National Int $56.2B
(68/103)

Corporate Bond $63.3B
(59/103)

Nontraditional Bond
$101.4B
(72/101)

Muni National Int $143.4B
(45/88)

Source: Morningstar, Inc., as of June 30, 2019.

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

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

How to read this table: The top left square tells you that Morningstar's Balanced category had the largest absolute outflow, while its return placed it 39th out of 103 fund categories.

Of interest: For the 1-month period, the Technology category had the fifth-largest absolute category outflow despite its performance ranking seventh of 103 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

Balanced –$4.8B
(39/103)

Balanced –$13.0B
(31/103)

Balanced –$21.6B
(42/103)

Balanced –$68.7B
(22/103)

Large Growth –$156.6B
(3/103)

Large Growth –$246.0B
(3/103)

Money Market –$504.2B
(86/101)

Large Growth –$513.6B
(5/88)

Bank Loan –$3.4B
(97/103)

Bank Loan –$9.4B
(81/103)

Bank Loan –$20.2B
(83/103)

Large Growth –$39.7B
(14/103)

Balanced –$129.0B
(29/103)

Balanced –$159.5B
(25/103)

Large Growth –$399.9B
(5/101)

Mid-Cap Growth –$84.5B
(4/88)

Short Government –$2.3B
(77/103)

Health –$7.1B
(87/103)

Large Growth –$15.5B
(6/103)

Bank Loan –$36.0B
(69/103)

Large Value –$61.2B
(19/103)

Large Value –$91.7B
(14/103)

World Large Stock –$71.9B
(19/101)

Small Growth –$51.3B
(7/88)

Trading-Levgd. Equity –$2.0B
(3/103)

Large Growth –$6.9B
(13/103)

Large Value –$12.1B
(28/103)

World Large Stock –$17.5B
(54/103)

High-Yield Bond –$37.8B
(41/103)

High-Yield Bond –$64.0B
(48/103)

Mid-Cap Growth –$69.7B
(3/101)

Mid-Cap Value –$28.5B
(19/88)

Technology –$1.8B
(7/103)

Frgn. Large Value –$5.5B
(62/103)

Frgn. Large Value –$9.2B
(45/103)

Financial –$16.9B
(74/103)

World Large Stock –$27.4B
(15/103)

World Bond –$55.8B
(74/103)

Large Value –$42.7B
(13/101)

World Large Stock –$27.2B
(20/88)

World Large Stock
–$1.8B
(24/103)

Frgn. Large Growth –$4.1B
(18/103)

World Large Stock –$7.9B
(23/103)

Frgn. Large Growth –$14.8B
(61/103)

Mid-Cap Value –$25.4B
(22/103)

Mid-Cap Growth –$52.4B
(4/103)

Small Growth –$42.4B
(8/101)

Muni NY Long –$7.1B
(54/88)

Frgn. Large Growth –$1.5B
(23/103)

Large Value –$3.5B
(30/103)

Health –$6.5B
(43/103)

Frgn. Large Value –$14.5B
(84/103)

Mid-Cap Growth –$23.8B
(5/103)

Bank Loan –$42.6B
(64/103)

Mid-Cap Value –$24.2B
(15/101)

Muni Single St. Int –$5.1B
(68/88)

Frgn. Large Value
–$1.3B
(26/103)

World Large Stock –$3.3B
(25/103)

Japan Stock –$6.2B
(57/103)

Mid-Cap Value –$13.8B
(73/103)

World Bond –$23.4B
(49/103)

World Large Stock –$39.4B
(18/103)

Trading-Levgd. Equity –$15.9B
(1/101)

Muni Single St. Long –$4.9B
(64/88)

Long-Short Eq.
–$1.2B
(42/103)

Mid-Cap Value –$3.2B
(36/103)

Frgn. Large Growth –$6.0B
(16/103)

Long-Short Eq. –$11.8B
(71/103)

Health –$22.1B
(20/103)

Mid-Cap Value –$32.9B
(21/103)

Muni NY Long –$10.4B
(47/101)

Muni PA –$3.4B
(57/88)

World Bond –$1.1B
(58/103)

World Bond –$2.9B
(28/103)

Financial –$5.8B
(25/103)

Large Value –$11.7B
(34/103)

Europe Stock –$20.9B
(31/103)

Small Growth –$31.2B
(8/103)

Muni Single St. Long –$5.6B
(69/101)

Muni CA Long –$3.2B
(47/88)

Source: Morningstar, Inc., as of June 30, 2019.

Notes: The above chart assumes that Morningstar balanced fund categories are aggregated . The Money Market category is also aggregated, inclusive of taxable, tax-exempt, and prime money market 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 June 2019

Leaders
1-month inflows3-month inflows12-month inflows
Volatility10.9%Trading-Levgd. Cmdty.22.3%Communications80.0%
Trading-Levgd. Cmdty.8.1%Long Government18.0%Long Government58.2%
Corporate Bond6.4%Volatility10.5%Volatility48.8%
Trading-Inverse Equity 5.4% Trading-Inverse Equity 9.3% Trading-Inverse Equity 45.7%
Cmdty Prec. Metals 5.1% Int. Government 8.4% Trading-Levgd. Cmdty. 35.9%

 

Laggards
1-month outflows3-month outflows12-month outflows
Trading-Levgd. Debt–26.8%Trading-Inverse Cmdty.–40.9%Trading-Inverse Cmdty.–42.6%
Cmdty. Ind. Metals–11.4%Cmdty. Ind. Metals–16.9%Trading-Inverse Debt–39.2%
Trading-Levgd. Equity–8.3%EM Local-Cur. Bond–11.2%Cmdty. Ind. Metals–38.0%
Trading-Inverse Cmdty. –8.0% China Region –9.8% Long-Short Eq. –30.2%
Bear Market –6.9% Trading-Levgd. Equity –9.3% Managed Futures –29.7%

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