Risk speedometer: Appetite for risk continues to decline

June 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 May, the 1-month risk speedometer dropped to the bottom decile of historical readings and was below the 5-year average for the 13th consecutive month. The 3-month measure showed a slight improvement in risk appetite, due to December's weakness rolling off, while the 12-month measure showed a meaningful decline in investors' risk tolerance from a year ago.

Vanguard's risk speedometers for May 2019

Risk speedometer April 2019 vs March 2019: 1 month endedRisk speedometer May 2019 vs February 2019: 3 months endedRisk speedometer May 2019 vs May 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 May 31, 2019.

General trends—Market returns and cash flows

U.S. equity funds and ETFs had redemptions of $15.6 billion in May. ETFs and active funds experienced outflows of $11.1 billion and $12.9 billion, respectively, while index funds had positive cash flows, gathering $8.4 billion. SPDR S&P 500 ETF (SPY), which is more representative of institutional investors, was responsible for much of the outflows, with $16.6 billion. U.S. active. equity funds have now had 62 consecutive months of outflows.

In May, global equity markets, as represented by the FTSE Global All Cap Index (–5.9%), had their first negative month since December 2018. Despite the market drop, developed international equity funds and ETFs gathered $4.8 billion. Emerging markets funds and ETFs had their first month with redemptions in 2019, shedding $3.2 billion. The China Region category was the main driver of the outflows, with $2.6 billion.

Taxable bond funds and ETFs once again had positive cash flows, capturing $17.7 billion. Flows were positive across all product segments, with ETFs leading the way with $9.9 billion in new investments. The Intermediate-Term Core Bond category, with an overall flow of $4.9 billion, was again the largest contributor. Ultrashort Bonds, with $3.2 billion, had their 34th consecutive monthly cash inflow.

Money Market funds recorded the largest net cash flows of any category, $82.3 billion, or just more than 2.5% of their starting AUM. This was the eighth-largest monthly flow into the category on an absolute basis since 1993, and the 49th-largest as a percentage of AUM. This large inflow, combined with strong flows into taxable bonds and outflows from equities, as mentioned above, greatly contributed to the sharp drop in the monthly risk speedometer reading.

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 May 2019

How to read this table: The top left square tells you that Morningstar's Money Market fund category had the largest absolute inflow, while its return placed it 41st out of 103 fund categories.

Of interest: The Money Market fund category had the largest absolute inflows for all periods through the 5 years ended May 31, which is a reversal of the 10-year trend, during which money markets had the largest absolute outflows (see the "cash laggards" table below).

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 $82.3B
(41/103)

Money Market $53.3B
(53/103)

Money Market $154.3B
(68/103)

Money Market $270.1B
(47/103)

Money Market $385.8B
(77/103)

Money Market $530.5B
(62/103)

Frgn. Large Blend $655.5B
(36/101)

Frgn. Large Blend $787.9B
(39/88)

Frgn. Large Blend $8.3B
(75/103)

Int Core Bond $26.9B
(15/103)

Large Blend $62.9B
(73/103)

Large Blend $115.5B
(28/103)

Large Blend $327.1B
(8/103)

Frgn. Large Blend $467.7B
(70/103)

Large Blend $546.0B
(8/101)

Large Blend $632.2B
(10/88)

Int Core-Plus Bond $6.2B
(18/103)

Large Blend $24.7B
(65/103)

Int Core Bond $39.6B
(12/103)

Ultrashort Bond $73.8B
(49/103)

Frgn. Large Blend $268.2B
(34/103)

Large Blend $448.0B
(6/103)

Int Core Bond $462.7B
(51/101)

Money Market $602.1B
(77/88)

Int Core Bond $4.9B
(10/103)

Int Core-Plus Bond $23.7B
(20/103)

Ultrashort Bond $21.9B
(66/103)

Frgn. Large Blend $44.9B
(78/103)

Int Core Bond $218.0B
(50/103)

Int Core Bond $335.1B
(36/103)

Diversified EM $303.6B
(45/101)

Int Core Bond $538.2B
(51/88)

Ultrashort Bond $3.3B
(43/103)

Muni National Int $11.3B
(25/103)

Muni National Int $20.3B
(29/103)

Int Core Bond $31.6B
(9/103)

Ultrashort Bond $151.9B
(74/103)

Ultrashort Bond $157.3B
(68/103)

Short-Term Bond $245.9B
(70/101)

Diversified EM $385.5B
(20/88)

Muni National Int $3.2B
(23/103)

Ultrashort Bond $9.2B
(55/103)

Int Core-Plus Bond $17.9B
(19/103)

Int Core-Plus Bond $27.2B
(21/103)

Diversified EM $110.3B
(13/103)

World Bond-USD Hdg $123.6B
(48/103)

Ultrashort Bond $217.2B
(78/101)

Int Core-Plus Bond $285.9B
(40/88)

Multisector Bond $2.6B
(39/103)

Short-Term Bond $8.1B
(39/103)

Diversified EM $17.6B
(51/103)

Muni National Int $25.9B
(25/103)

Int Core-Plus Bond $94.4B
(47/103)

Diversified EM $123.1B
(63/103)

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

Short-Term Bond $246.5B
(64/88)

Short-Term Bond $2.2B
(35/103)

Multisector Bond $7.9B
(35/103)

World Bond-USD Hdg $14.7B
(49/103)

World Bond-USD Hdg $20.4B
(40/103)

World Bond-USD Hdg $84.0B
(69/103)

Int Core-Plus Bond $99.4B
(44/103)

World Bond-USD Hdg $159.1B
(61/101)

Ultrashort Bond $203.8B
(81/88)

World Bond-USD Hdg $2.1B
(29/103)

Int Government $7.8B
(26/103)

Int Government $14.7B
(28/103)

Diversified EM $20.3B
(80/103)

Muni National Int $56.0B
(61/103)

Muni National Int $95.8B
(43/103)

Muni National Int $120.6B
(53/101)

World Bond-USD Hdg $162.0B
(53/88)

Long Government $2.0B
(7/103)

World Bond-USD Hdg $7.7B
(29/103)

Frgn. Large Blend $14.0B
(63/103)

Short-Term Bond $19.0B
(38/103)

Short-Term Bond $53.6B
(66/103)

Short-Term Bond $63.5B
(56/103)

Nontraditional Bond $101.1B
(67/101)

Muni National Int $140.7B
(44/88)

Source: Morningstar, Inc., as of May 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 May 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 85th out of 103 fund categories.

Of interest: For the 1-month period, many of the largest absolute outflows were in categories that also had performances that ranked at the bottom.

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 –$7.6B
(85/103)

Large Growth –$13.7B
(52/103)

Balanced –$34.3B
(58/103)

Balanced –$70.4B
(44/103)

Large Growth –$168.9B
(4/103)

Large Growth –$251.8B
(3/103)

Money Market –$656.2B
(84/101)

Large Growth –$513.3B
(5/88)

High-Yield Bond –$5.8B
(56/103)

Balanced –$11.8B
(57/103)

Bank Loan –$31.8B
(62/103)

Large Growth –$44.2B
(42/103)

Balanced –$139.5B
(30/103)

Balanced –$163.0B
(25/103)

Large Growth –$397.7B
(4/101)

Mid-Cap Growth –$85.8B
(4/88)

Bank Loan –$3.1B
(52/103)

Bank Loan –$9.6B
(51/103)

Large Growth –$24.8B
(43/103)

Bank Loan –$30.3B
(50/103)

Large Value –$56.4B
(20/103)

Large Value –$88.0B
(15/103)

Mid-Cap Growth –$70.3B
(3/101)

Small Growth –$49.7B
(9/88)

Balanced –$2.6B
(61/103)

Large Value –$7.5B
(73/103)

Frgn. Large Value –$11.2B
(81/103)

Financial –$18.6B
(77/103)

High-Yield Bond –$45.4B
(36/103)

High-Yield Bond –$68.7B
(49/103)

World Large Stock –$70.2B
(22/101)

Mid-Cap Value –$34.6B
(19/88)

China Region –$2.6B
(98/103)

Health –$6.7B
(96/103)

Financial –$11.0B
(91/103)

Large Value –$17.5B
(57/103)

World Large Stock –$28.2B
(18/103)

Mid-Cap Growth –$55.0B
(4/103)

Small Growth –$40.8B
(7/101)

World Large Stock –$24.2B
(21/88)

Health –$2.5B
(62/103)

Frgn. Large Value –$5.4B
(84/103)

Frgn. Large Growth –$10.9B
(32/103)

World Large Stock –$15.8B
(64/103)

Mid-Cap Growth –$26.8B
(5/103)

World Bond –$54.2B
(73/103)

Large Value –$40.3B
(14/101)

Muni NY Long –$7.4B
(52/88)

Large Value –$2.1B
(86/103)

Frgn. Large Growth –$4.3B
(56/103)

Large Value –$10.9B
(89/103)

Frgn. Large Value –$15.4B
(86/103)

World Bond –$24.9B
(51/103)

Bank Loan –$42.3B
(57/103)

Mid-Cap Value –$32.3B
(15/101)

Muni Single St. Int –$5.4B
(68/88)

Eq. Energy –$2.0B
(99/103)

Japan Stock –$3.9B
(75/103)

Health –$8.6B
(97/103)

Frgn. Large Growth –$14.9B
(75/103)

Mid-Cap Value –$24.4B
(24/103)

World Large Stock –$36.5B
(21/103)

Trading-Levgd. Equity –$13.8B
(1/101)

Muni Single St. Long –$5.3B
(62/88)

Financial –$1.7B
(89/103)

Mid-Cap Value –$3.9B
(83/103)

World Large Stock –$8.4B
(60/103)

Europe Stock –$14.2B
(82/103)

Europe Stock –$23.0B
(49/103)

Mid-Cap Value –$33.3B
(20/103)

Muni NY Long –$10.5B
(46/101)

Muni CA Long –$4.1B
(46/88)

Small Blend –$1.4B
(94/103)

Small Blend –$3.7B
(93/103)

Mid-Cap Value –$6.7B
(87/103)

Mid-Cap Value –$13.3B
(70/103)

Health –$22.5B
(27/103)

Small Growth –$31.8B
(7/103)

Muni Single St. Long –$5.7B
(65/101)

Muni PA –$3.6B
(57/88)

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

Leaders
1-month inflows 3-month inflows12-month inflows
Muni Single St. Short100.0%Muni Single St. Short100.0%Trading-Levgd. Debt100.8%
Trading-Levgd. Debt73.5%Trading-Levgd. Debt45.3%Communications84.0%
Trading-Levgd. Cmdty.13.8%Volatility22.6%Target Maturity71.7%
Bear Market 6.7% Target Maturity 14.7% Long Government 44.9%
Trading-Inverse Equity 4.4% Trading-Inverse Equity 8.9% Ultrashort Bond 41.6%

 

Laggards
1-month outflows3-month outflows12-month outflows
Trading-Inverse Cmdty.–31.1%Trading-Inverse Cmdty.–21.3%Trading-Inverse Debt–40.7%
Volatility–24.2%Single Currency–12.7%Cmdty. Ind. Metals–32.8%
China Region–8.5%Japan Stock–12.3%Trading-Inverse Cmdty.–31.3%
EM Local-Cur. Bond –5.6% Cmdty. Energy –11.8% Managed Futures –30.8/%
Eq. Energy –5.1% EM Local-Cur. Bond –10.8% Multicurrency –28.3%

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