Risk speedometer: Risk continues to sway

May 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 April, the 1-month risk speedometer continued to sway, decreasing slightly as compared with March's reading while continuing to remain well below the 5-year average. Meanwhile, the 3-month measure indicates a slight improvement in risk appetite, because of December's weakness rolling off, and the 12-month measure shows a meaningful decline in the risk tolerance for investors' new mutual fund cash flows.

Vanguard's risk speedometers for April 2019

Risk speedometer April 2019 vs March 2019: 1 month endedRisk speedometer April 2019 vs January 2019: 3 months endedRisk speedometer April 2019 vs April 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 April 30, 2019.

General trends—Market returns and cash flows

U.S. equity funds and ETFs recorded relatively flat flows, losing $0.1 billion in April. ETFs continued to remain in strong demand, taking in nearly $19.5 billion while index funds also recorded positive net flows of $2.5 billion. U.S. active equity funds registered their 61st consecutive monthly outflow, $22.2 billion.

Global equity markets continued to add on to their impressive first-quarter gains, returning 3.4% in April, as represented by the FTSE Global All Cap Index. Despite these gains, developed international equity funds and ETFs incurred net outflows, of $11.3 billion. Both index and active funds recorded net outflows ($6.6 billion and $9.5 billion, respectively) while ETFs took in $4.8 billion. Emerging markets funds and ETFs had positive net flows of $2.5 billion across all product types.

U.S. taxable bond funds and ETFs were again a source of strong net inflows, adding $30.4 billion. April began the introduction of new Morningstar, Inc., category classifications, an effort to provide further transparency. The Intermediate-Term Bond category has been broken into Intermediate-Term Core and Core Plus categories. Funds in the Core Plus category have allocations of greater than 5% in high-yield bonds. As such, the splitting of the Intermediate-Term Bond category further allows our risk speedometers to dive deeper into asset flows and categorize risk accordingly, low and high respectively.

Money markets experienced their second consecutive monthly net outflows of $16.0 billion. That said, it was not enough to offset the stronger flows into taxable bonds relative to equity as mentioned above and hence recording the lower risk 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 April 2019

How to read this table: The top left square tells you that Morningstar's new Intermediate-Term Core Bond category had the largest absolute inflow, while its return placed it 83rd out of 103 fund categories.

Of interest: New for the month, Morningstar's splitting of the Intermediate-Term Bond category further illustrates the performance differential between lower- and higher-risk categorization.

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

Int Core Bond $20.5B
(83/103)

Int Core Bond $41.6B
(70/103)

Money Market $157.8B
(87/103)

Money Market $247.0B
(58/103)

Large Blend $330.2B
(7/103)

Frgn. Large Blend $464.5B
(55/103)

Frgn. Large Blend $651.7B
(34/102)

Frgn. Large Blend $788.2B
(36/88)

Large Blend $9.1B
(14/103)

Large Blend $36.6B
(14/103)

Large Blend $107.4B
(16/103)

Large Blend $129.5B
(5/103)

Money Market $300.8B
(74/103)

Large Blend $456.3B
(7/103)

Large Blend $557.0B
(6/102)

Large Blend $640.3B
(9/88)

Int Core-Plus Bond $8.1B
(76/103)

Int Core-Plus Bond $20.3B
(71/103)

Int Core Bond $40.5B
(38/103)

Ultrashort Bond $76.0B
(57/103)

Frgn. Large Blend $267.1B
(33/103)

Money Market $454.1B
(66/103)

Int Core Bond $473.4B
(57/102)

Int Core Bond $546.8B
(51/88)

Long Government $3.9B
(94/103)

Muni National Int $14.3B
(66/103)

Ultrashort Bond $32.0B
(86/103)

Frgn. Large Blend $47.4B
(77/103)

Int Core Bond $228.3B
(58/103)

Int Core Bond $342.1B
(42/103)

Diversified EM $309.7B
(37/102)

Money Market $525.1B
(76/88)

Muni National Int $3.4B
(67/103)

Money Market $11.5B
(90/103)

Diversified EM $25.1B
(5/103)

Int Core Bond $36.8B
(21/103)

Ultrashort Bond $150.1B
(73/103)

Ultrashort Bond $152.7B
(71/103)

Short-Term Bond $251.4B
(74/102)

Diversified EM $386.7B
(21/88)

Multisector Bond $3.1B
(49/103)

World Bond-USD Hdg $10.8B
(68/103)

Muni National Int $17.2B
(56/103)

Muni National Int $24.4B
(35/103)

Diversified EM $110.1B
(20/103)

Diversified EM $128.5B
(39/103)

Ultrashort Bond $214.9B
(80/102)

Int Core-Plus Bond $291.6B
(43/88)

Int Government $3.0B
(86/103)

High-Yield Bond $10.1B
(43/103)

Short Government $14.2B
(59/103)

World Bond-USD Hdg $20.3B
(53/103)

Int Core-Plus Bond $92.9B
(57/103)

World Bond-USD Hdg $123.4B
(53/103)

Int Core-Plus Bond $186.1B
(50/102)

Short-Term Bond $248.6B
(65/88)

World Bond-USD Hdg $2.5B
(82/103)

Diversified EM $9.2B
(37/103)

Int Government $14.1B
(45/103)

Short-Term Bond $18.7B
(48/103)

World Bond-USD Hdg $82.9B
(72/103)

Muni National Int $96.0B
(49/103)

World Bond-USD Hdg $157.7B
(65/102)

Ultrashort Bond $202.2B
(83/88)

Ultrashort Bond $2.4B
(72/103)

Int Government $9.1B
(83/103)

Short-Term Bond $13.8B
(78/103)

Int Core-Plus Bond $18.5B
(36/103)

Muni National Int $57.2B
(66/103)

Int Core-Plus Bond $92.8B
(47/103)

Muni National Int $122.2B
(59/102)

World Bond-USD Hdg $160.8B
(55/88)

Muni National Long $2.4B
(58/103)

Short-Term Bond $8.3B
(81/103)

World Bond-USD Hdg $13.1B
(79/103)

Diversified EM $18.5B
(81/103)

Short-Term Bond $54.2B
(71/103)

Short-Term Bond $63.8B
(64/103)

Nontraditional Bond $102.8B
(70/102)

Muni National Int $141.0B
(46/88)

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

How to read this table: The top left square tells you that Morningstar's Money Market category had the largest absolute outflow, while its return placed it 77th out of 103 fund categories.

Of interest: For the 1-month period, the Money Market category had the largest absolute outflow. Short-term weakness in money market flows has been observed since recent Federal Reserve meetings and the lowering of projected rate increases.

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 –$16.0B
(77/103)

Large Growth –$9.6B
(6/103)

Bank Loan –$33.7B
(88/103)

Balanced –$38.1B
(17/103)

Large Growth –$171.9B
(4/103)

Large Growth –$250.0B
(3/103)

Money Market –$758.4B
(85/102)

Large Growth –$513.8B
(4/88)

Frgn. Large Blend –$6.6B
(30/103)

Bank Loan –$9.1B
(58/103)

Large Growth –$19.5B
(14/103)

Large Growth –$29.5B
(7/103)

Balanced –$69.0B
(28/103)

Large Value –$84.5B
(14/103)

Large Growth –$395.3B
(3/102)

Mid-Cap Growth –$84.8B
(2/88)

Health –$4.0B
(98/103)

Frgn. Large Value –$7.5B
(35/103)

Balanced –$19.1B
(30/103)

Bank Loan –$23.6B
(56/103)

Large Value –$53.2B
(15/103)

High-Yield Bond –$57.4B
(48/103)

World Large Stock –$70.3B
(20/102)

Small Growth –$51.5B
(7/88)

Frgn. Large Value –$3.6B
(22/103)

Large Value –$7.3B
(25/103)

Frgn. Large Growth –$13.1B
(18/103)

Financial –$17.4B
(67/103)

High-Yield Bond –$40.8B
(38/103)

Mid-Cap Growth –$55.5B
(5/103)

Mid-Cap Growth –$67.9B
(4/102)

Mid-Cap Value –$33.3B
(17/88)

Large Value –$3.1B
(19/103)

World Large Stock –$5.6B
(23/103)

Frgn. Large Value –$11.0B
(51/103)

Large Value –$17.0B
(15/103)

World Large Stock –$30.5B
(16/103)

Balanced –$53.8B
(27/103)

Large Value –$45.0B
(13/102)

World Large Stock –$22.2B
(20/88)

Bank Loan –$2.9B
(41/103)

Frgn. Large Growth –$4.6B
(17/103)

Financial –$10.8B
(34/103)

World Large Stock –$16.3B
(44/103)

Mid-Cap Growth –$27.6B
(6/103)

World Bond –$53.4B
(74/103)

Small Growth –$39.1B
(7/102)

Muni NY Long –$7.3B
(54/88)

EM Bond –$2.1B
(84/103)

Health –$3.6B
(93/103)

World Large Stock –$8.5B
(23/103)

Europe Stock –$15.6B
(83/103)

World Bond –$26.8B
(56/103)

Bank Loan –$40.8B
(60/103)

Mid-Cap Value –$30.9B
(17/102)

Muni Single St. Long –$5.9B
(64/88)

Frgn. Large Growth –$2.1B
(26/103)

Japan Stock –$3.5B
(48/103)

Nontraditional Bond –$7.9B
(83/103)

Frgn. Large Value –$15.4B
(85/103)

Europe Stock –$24.8B
(39/103)

World Large Stock –$36.6B
(18/103)

Trading-Levgd. Equity –$14.0B
(1/102)

Muni Single St. Int –$5.7B
(70/88)

Small Blend –$1.9B
(16/103)

Balanced –$3.1B
(31/103)

Long-Short Eq. –$7.0B
(77/103)

Mid-Cap Value –$13.8B
(50/103)

Mid-Cap Value –$22.6B
(21/103)

Small Growth –$32.9B
(8/103)

Muni NY Long –$10.1B
(51/102)

Muni CA Long –$4.5B
(45/88)

Mid-Cap Value –$1.8B
(20/103)

Small Blend –$3.1B
(27/103)

Mid-Cap Growth –$6.3B
(9/103)

Frgn. Large Growth –$13.1B
(70/103)

Health –$20.6B
(26/103)

Mid-Cap Value –$31.2B
(17/103)

Muni Single St. Long –$5.8B
(73/102)

Muni PA –$3.2B
(61/88)

Source: Morningstar, Inc., as of April 30, 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.

Besides the new categories outlined above, additional categories were added. Of special note, the introduction of World Bond-USD Hedged provides further transparency into international bond investing. We can now further differentiate between international fixed income mandates that are hedged versus unhedged and as such, low risk versus high risk.

Cash leaders and laggards by AUM percentage, as of April 2019

Leaders
1-month inflows 3-month inflows12-month inflows
Muni Single St. Short100.0%Volatility121.6%Communications89.9%
Target Maturity95.9%Muni Single St. Short100.0%Volatility76.0%
Volatility24.4%Target Maturity17.2%Target Maturity72.3%
Long Government 4.2% Communications 17.0% Ultrashort Bond 45.7%
Trading-Misc. 3.9% Trading-Inverse Cmdty. 12.3% Muni Target Mat. 41.9%

 

Laggards
1-month outflows3-month outflows12-month outflows
Trading-Levgd. Debt–24.7%Trading-Levgd. Debt–30.1%Trading-Inverse Debt–39.4%
Cmdty. Ind. Metals–5.1%Single Currency–20.1%Cmdty. Ind. Metals–29.7%
Cmdty. Energy–3.5%Trading-Levgd. Cmdty.–20.0%Managed Futures–29.1%
Managed Futures –2.8% Cmdty. Energy –14.4% Trading-Levgd. Debt –25.9%
Cmdty. Prec. Metals –2.6% Managed Futures –11.4% Long-Short Eq. –24.9%

Source: Vanguard calculations using data provided by Morningstar, Inc., as of April 30, 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 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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