Risk speedometer: Risk wanes

March 22, 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 February, the 1-month risk speedometer remained below the 5-year average, registering a score of –0.97 and moving below the 25th percentile of rankings. Similarly, for the 3- and 12-month risk speedometers, the risk appetite remained well below the 5-year averages.

Vanguard's risk speedometers for February 2019

Risk speedometer January 2019 vs January 2019: 1 month endedRisk speedometer January 2019 vs November 2018: 3 months endedRisk speedometer February 2019 vs February 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 February 28, 2019.

General trends—Market returns and cash flows

U.S. equity funds and ETFs registered modest inflows in February of $3.2 billion. U.S. stocks continued to rally, registering their best year-to-date start dating back to 1991.1 Looking at the various product instruments in the category, ETFs and index funds led, capturing $9.8 billion and $3.3 billion, respectively. U.S. equity active fund outflows persisted, with the category losing $10.0 billion.

Global equity markets, as represented by the FTSE Global All Cap Index, recorded a gain for February of 2.8%. Despite the positive performance, developed international equity funds and ETFs had net outflows of $5.3 billion, with ETFs losing $4.0 billion and active funds losing $3.5 billion. Offsetting the outflows were index funds, which captured $2.2 billion. Again this month, emerging markets funds and ETFs had strong inflows, capturing $6.2 billion. ETFs accounted for the lion’s share of the flows with $5.4 billion.

U.S. taxable bond funds and ETFs were again an area of strength in February and a large driver in risk-off sentiment, gaining $25.7 billion. Flows remained strong across multiple product segments, with active funds accounting for almost half of the net inflow. Intermediate-term bond funds and ETFs were again the biggest driver for this category, registering more than half of the overall flow with $15.5 billion. The ultrashort-bond category continued with positive inflows, marking its 31st consecutive month of net inflows, albeit modestly dropping off from its recent strength with $1.5 billion. Net inflows for money markets returned with strength, with the category taking in $41.3 billion, and money markets were another large contributor to the reduction in risk sentiment.

We previously examined the first-quarter effect and saw this trend playing out again in the first two months of 2019. As expected, there was a high correlation between the speedometers' first-quarter readings with those of prior years' market performance.

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 return performances.

Cash leaders, absolute dollar flows, and returns, as of February 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 75 out of 98 fund categories.

Of interest: The top 2 absolute category inflows for the month were Money Markets and Intermediate-Term Bonds, in light of their performance rankings of 75 and 76, respectively, out of 98.

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 $41.3B
(75/98)

Money Market $101.6B
(78/98)

Money Market $197.1B
(39/98)

Money Market $211.9B
(44/98)

Int-Term Bond $299.0B
(59/98)

Frgn. Large Blend $476.4B
(48/98)

Frgn. Large Blend $662.2B
(33/97)

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

Int-Term Bond $15.5B
(76/98)

Large Blend $36.0B
(72/98)

Large Blend $74.2B
(50/98)

Ultrashort Bond $81.9B
(41/98)

Frgn. Large Blend $274.5B
(35/98)

Money Market $397.0B
(63/98)

Int-Term Bond $615.3B
(52/97)

Int-Term Bond $778.5B
(43/83)

Large Blend $9.2B
(22/98)

Diversified EM $14.3B
(10/98)

Ultrashort Bond $42.8B
(41/98)

Large Blend $77.8B
(8/98)

Money Market $272.0B
(67/98)

Large Blend $391.9B
(4/98)

Large Blend $462.2B
(8/97)

Money Market $581.1B
(72/83)

Muni National Int $6.2B
(62/98)

Ultrashort Bond $13.1B
(77/98)

Frgn. Large Blend $23.4B
(62/98)

Frgn. Large Blend $66.9B
(75/98)

Large Blend $270.1B
(8/98)

Int-Term Bond $387.7B
(42/98)

Diversified EM $311.2B
(31/97)

Large Blend $562.7B
(10/83)

High-Yield Bond $5.6B
(41/98)

Muni National Int $9.2B
(55/98)

Diversified EM $22.5B
(44/98)

Diversified EM $22.0B
(89/98)

Ultrashort Bond $140.0B
(74/98)

Ultrashort Bond $148.4B
(70/98)

Short-term Bond $252.6B
(76/97)

Diversified EM $384.0B
(24/83)

World Bond $5.5B
(69/98)

Short Government $9.0B
(73/98)

Short Government $15.9B
(10/98)

Short Government $19.1B
(17/98)

Diversified EM $112.5B
(11/98)

Diversified EM $131.9B
(36/98)

Ultrashort Bond $210.8B
(81/97)

Short-term Bond $244.6B
(64/83)

Diversified EM $5.4B
(54/98)

Frgn. Large Blend $8.1B
(29/98)

Muni National Int $10.3B
(20/98)

Muni National Int $18.6B
(27/98)

Muni National Int $55.0B
(75/98)

Muni National Int $91.1B
(47/98)

World Bond $166.3B
(55/97)

World Bond $202.8B
(46/83)

Multisector Bond $2.8B
(53/98)

Int Government $6.9B
(51/98)

Short-Term Bond $9.4B
(23/98)

Long Government $16.3B
(11/98)

Short-Term Bond $52.4B
(71/98)

Corporate Bond $72.4B
(61/98)

Muni National Int $116.7B
(62/97)

Ultrashort Bond $196.2B
(75/83)

Long Government $2.8B
(91/98)

Short-Term Bond $6.0B
(67/98)

Long Government $8.2B
(9/98)

Int-Term Bond $15.5B
(23/98)

World Bond $48.2B
(54/98)

World Bond $63.3B
(58/98)

Nontraditional Bond $104.6B
(61/97)

Muni National Int $133.6B
(47/83)

Real Estate $2.8B
(42/98)

Int-Term Bond $5.9B
(37/98)

Int Government $6.6B
(11/98)

Int Government $12.6B
(22/98)

Corporate Bond $47.7B
(64/98)

Short-Term Bond $60.5B
(62/98)

Corporate Bond $103.1B
(53/97)

Multisector Bond $123.1B
(30/83)

Source: Morningstar, Inc., as of February 28, 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 February 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 20 out of 98 fund categories.

Of interest: For the one-month period, Large Growth and Large Value ranked in the top five of absolute category outflows, compared with the exhibited strength of Large Blend, which ranked third in absolute category inflows in the above chart.

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 –$2.9B
(20/98)

Bank Loan –$22.4B
(74/98)

Bank Loan –$25.8B
(47/98)

Balanced –$40.6B
(32/98)

Large Growth –$181.3B
(5/98)

Large Growth –$248.8B
(2/98)

Money Market –$822.1B
(86/97)

Large Growth –$508.8B
(4/83)

Bank Loan –$2.8B
(38/98)

Balanced –$11.7B
(59/98)

Balanced –$24.4B
(49/98)

Large Growth –$25.0B
(16/98)

Balanced –$64.4B
(36/98)

High-Yield Bond –$59.2B
(50/98)

Large Growth –$392.7B
(5/97)

Mid-Cap Growth –$94.1B
(3/83)

World Stock –$2.7B
(27/98)

Large Growth –$9.3B
(38/98)

Large Growth –$20.1B
(78/98)

Europe Stock –$19.5B
(81/98)

Large Value –$39.6B
(16/98)

Mid-Cap Growth –$58.1B
(6/98)

Mid-Cap Growth –$75.4B
(3/97)

Small Growth –$49.6B
(6/83)

Frgn. Large Value –$2.6B
(34/98)

Financial –$8.6B
(86/98)

Financial –$13.2B
(80/98)

Large Value –$16.9B
(45/98)

High-Yield Bond –$31.8B
(44/98)

Large Value –$55.7B
(13/98)

World Large Stock –$74.5B
(20/97)

Mid-Cap Value –$24.6B
(17/83)

Large Value –$2.5B
(26/98)

Frgn. Large Growth –$5.9B
(16/98)

Technology –$11.3B
(75/98)

Financial –$15.9B
(77/98)

Mid-Cap Growth –$31.4B
(6/98)

Balanced –$41.8B
(26/98)

Small Growth –$38.3B
(6/97)

World Large Stock –$19.4B
(20/83)

Financial –$1.6B
(18/98)

Frgn. Large Value –$5.7B
(41/98)

Multisector Bond –$10.7B
(17/98)

World Large Stock –$15.1B
(61/98)

World Large Stock –$30.1B
(21/98)

World Large Stock –$33.9B
(19/98)

Mid-Cap Value –$28.6B
(15/97)

Muni NY Long –$7.8B
(54/83)

Europe Stock –$1.1B
(24/98)

World Large Stock –$5.7B
(33/98)

Frgn. Large Value –$8.7B
(68/98)

High-Yield Bond –$13.0B
(46/98)

Europe Stock –$29.6B
(47/98)

Small Growth –$33.6B
(10/98)

Large Value –$27.7B
(14/97)

Muni Single St. Long –$6.5B
(65/83)

Managed Futures –$0.8B
(81/98)

Nontraditional Bond –$4.9B
(75/98)

High-Yield Bond –$8.5B
(45/98)

Mid-Cap Value –$12.5B
(53/98)

Health –$20.0B
(20/98)

Bank Loan –$33.2B
(57/98)

Trading-Levgd. Equity –$16.5B
(1/97)

Muni Single St. Int –$6.0B
(67/83)

Cmdty Prec Metals –$0.7B
(90/98)

Long-Short Eq. –$4.2B
(82/98)

World Large Stock –$8.3B
(65/98)

Bank Loan –$11.5B
(49/98)

Mid-Cap Value –$18.5B
(18/98)

Mid-Cap Value –$26.8B
(17/98)

Muni NY Long –$10.3B
(54/97)

Muni CA Long –$5.8B
(48/83)

Small Blend –$0.7B
(10/98)

Technology –$4.2B
(8/98)

Nontraditional Bond –$7.5B
(46/98)

Frgn. Large Value –$11.5B
(83/98)

Frgn. Large Value –$15.5B
(32/98)

Long-Short Eq. –$18.4B
(74/98)

Muni Single St. Long –$6.0B
(69/97)

Muni PA –$3.5B
(60/83)

Source: Morningstar, Inc., as of February 28, 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 February 2019

Leaders
1-month inflows 3-month inflows12-month inflows
Volatility49.3%Trading-Levgd. Cmdty.30.0%Communications63.8%
Trading-Inverse Equity5.3%Volatility22.1%Ultrashort Bond50.3%
Long Government5.2%Short Government13.7%Long Government43.0%
Cmdty. Ind. Metals 4.6% Communications 12.7% Short Government 34.8%
Communications 4.5% Single Currency 12.4% Trading-Inverse Equity 31.8%

 

Laggards
1-month outflows3-month outflows12-month outflows
Trading-Levgd. Debt–16.0%Trading-Inverse Cmdty.–77.5%Trading-Inverse Debt–40.5%
Trading-Inverse Cmdty–9.0%Trading-Inverse Debt–18.8%Cmdty. Ind. Metals–31.6%
Trading-Inverse Debt–5.4%Bank Loan–15.4%Cmdty. Energy–26.7%
Managed Futures –5.0% Financial –12.5% Managed Futures –25.1%
Cmdty. Energy –3.1% Long-Short Eq. –12.5% Europe Stock –24.1%

Source: Vanguard calculations using data provided by Morningstar, Inc., as of February 28, 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.2 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 Cash flow data go back to 1993.

2 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.
 

Our insights straight
to your inbox

Our insights straight to your inbox

Receive our latest Advisor's Digest
research
and commentary sent the
first business
morning every week.

A weekly digest of our latest research and commentary. Topics include the economy and markets, portfolio strategy, ETFs, and practice management.


Fund openings/closings, fund manager changes, dividend distributions, webinars, and other events you might want to know about.



Already registered? Log on to
manage your
email subscriptions.