Risk speedometer: Foot off the accelerator

September 27, 2018

 

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.

Global equity markets continued their upward momentum in August, gaining 0.90% as represented by the FTSE Global All Cap Index.

U.S. equity funds and ETFs posted net outflows of $1.4 billion in August despite a strong performance for U.S. equities that month, 3.45% as represented by the CRSP US Total Market Index. That said, and looking deeper into the aggregate flows, U.S. equity ETFs continued their strong net inflows, with $14.8 billion, while U.S. equity index funds lost $1.7 billion. The largest driver offsetting the overall net inflows was active funds, losing $14.5 billion. Non-U.S. equities in August continued to gather positive net cash flows overall. Developed international equity funds and ETFs captured $1.4 billion, while emerging markets also returned to positive net cash flows of $1.8 billion.

U.S. taxable bond funds and ETFs continued their streak of strong monthly net inflows, capturing $15.6 billion. Intermediate-term bonds and long government bonds also had another strong month of net inflows, gathering $1.9 billion and $2.1 billion, respectively. Ultrashort bonds continued to be the largest driver of the overall net cash flows, gathering $9.7 billion. Tax-exempt bond funds and ETFs recorded $2.5 billion of net inflows. Money markets also continued to attract positive net cash flows, notching $36.3 billion

Given the combination of flows between higher-risk and lower-risk asset classes, the 1-month risk speedometer nudged lower in August at –0.68, still holding well below its 5-year mean. The 3- and 12-month readings declined from where they were in May and the previous August, respectively, and they also continued to hold well below their 5-year means.

Vanguard's risk speedometers for August 2018

Risk speedometer August 2018 vs July 2018: 1 month endedRisk speedometer August 2018 vs May 2018: 3 months endedRisk speedometer August 2018 vs August 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 because of changes made in the Morningstar, Inc., data and to the updating of the five-year average.

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

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' return performance.

Cash leaders, absolute dollar flows, and returns as of August 2018

How to read this table: The top left square tells you that for the month ended August 31, 2018, Morningstar's Money Market category had the largest absolute inflow, while its return placed it 53rd out of 98 fund categories.

Of interest: Categories sensitive to interest rates had the vast majority of top cash flows for all time periods rather than equity categories.

Equity

Bond

Other Taxable Bond

Balanced

Money Market


Short-Term

Long-Term

1Mo

3Mo

6Mo

1Yr

3Yr

5Yr

10Yr

15Yr

Money Market $36.3B
(53/98)

Money Market $26.6B
(53/98)

Frgn. Large Blend $41.5B
(74/98)

Money Market $128.2B
(41/98)

Int-Term Bond $322.2B
(58/98)

Frgn. Large Blend $487.8B
(36/98)

Frgn. Large Blend $634.9B
(43/97)

Frgn. Large Blend $829.78B
(32/83)

Ultrashort Bond $9.7B
(50/98)

Ultrashort Bond $22.0B
(48/98)

Ultrashort Bond $39.0B
(43/98)

Frgn. Large Blend $109.6B
(40/98)

Frgn. Large Blend $285.6B
(37/98)

Large Blend $367.2B
(7/98)

Int-Term Bond $599.1B
(40/97)

Int-Term Bond $779.6B
(46/83)

Balanced $4.8B
(28/98)

Frgn. Large Blend $13.1B
(72/98)

Money Market $20.6B
(56/98)

Int-Term Bond $108.7B
(72/98)

Large Blend $233.9B
(8/98)

Int-Term Bond $349.3B
(55/98)

Large Blend $449.0B
(7/97)

Large Blend $554.3B
(13/83)

Frgn. Large Blend $3.2B
(78/98)

Int-Term Bond $7.0B
(42/98)

Int-Term Bond $17.8B
(40/98)

Large Blend $59.7B
(12/98)

Money Market $181.7B
(61/98)

Money Market $226.8B
(70/98)

Diversified EM $294.4B
(64/97)

Diversified EM $368.1B
(20/83)

Health $2.3B
(5/98)

Small Growth $6.8B
(3/98)

Bank Loan $14.3B
(45/98)

Ultrashort Bond $59.6B
(43/98)

Ultrashort Bond $100.0B
(70/98)

Ultrashort Bond $111.6B
(74/98)

Short-Term Bond $244.1B
(67/97)

Short-Term Bond $238.6B
(68/83)

Long Government $2.1B
(22/98)

Long Government $6.6B
(60/98)

Small Blend $12.4B
(4/98)

Diversified EM $29.3B
(81/98)

Diversified EM $83.9B
(20/98)

Diversified EM $109.5B
(43/98)

Ultrashort Bond $166.7B
(72/97)

Money Market $238.2B
(75/83)

Small Blend $2.0B
(11/98)

Inflation-Protected Bond $5.5B
(29/98)

Small Growth $11.3B
(1/98)

World Bond $27.9B
(56/98)

Muni National Int $56.9B
(62/98)

Muni National Int $75.8B
(54/98)

World Bond $155.9B
(53/97)

World Bond $204.0B
(48/83)

Small Growth $2.0B
(2/98)

Small Blend $5.4B
(12/98)

World Bond $9.3B
(65/98)

Muni National Int $22.7B
(58/98)

Corporate Bond $55.2B
(71/98)

Corporate Bond $69.6B
(65/98)

Corporate Bond $113.1B
(42/97)

Ultrashort Bond $148.0B
(79/83)

Int-Term Bond $1.9B
(26/98)

Bank Loan $5.0B
(40/98)

Muni National Int $8.3B
(41/98)

Nontraditional Bond $18.4B
(67/98)

Inflation-Protected Bond $45.3B
(60/98)

Short-Term Bond $63.5B
(68/98)

Nontraditional Bond $112.7B
(69/97)

Multisector Bond $140.8B
(38/83)

Diversified EM $1.9B
(87/98)

Muni National Int $4.9B
(50/98)

Long Government $8.2B
(31/98)

Inflation-Protected Bond $17.8B
(48/98)

Short-Term Bond $45.0B
(75/98)

World Bond $63.1B
(66/98)

Bank Loan $111.0B
(63/97)

Mid-Cap Blend $133.2B
(12/83)

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

Notes: The table above 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 August 2018

How to read this table: The top left square tells you that for the month ended August 31, 2018, Morningstar's Large Value category had the largest absolute outflow, while its return placed it 21st out of 98 fund categories.

Of interest: For August, Large Growth was the second-largest category for absolute outflow, despite it posting strong relative performance, ranking ninth out of 98 fund categories.

Equity

Bond

Other Taxable Bond

Balanced

Money Market

Alternative/MIsc.


Short-Term

Long-Term

1Mo

3Mo

6Mo

1Yr

3Yr

5Yr

10Yr

15Yr

Large Value –$2.4B
(21/98)

Large Blend –$13.0B
(9/98)

Large Value –$14.6B
(23/98)

Large Value –$32.4B
(18/98)

Large Growth –$171.9B
(4/98)

Large Growth –$234.4B
(4/98)

Money Market –$507.4B
(74/97)

Large Growth –$479.8B
(6/83)

Large Growth –$2.1B
(9/98)

Large Growth –$9.3B
(6/98)

Europe Stock –$12.0B
(73/98)

Large Growth –$29.7B
(6/98)

Balanced –$50.3B
(31/98)

Mid-Cap Growth –$49.5B
(10/98)

Large Growth –$397.0B
(4/97)

Mid-Cap Growth –$89.8B
(5/83)

Cmdty Prec Metals –$1.8B
(75/98)

Large Value –$7.1B
(15/98)

Balanced –$9.1B
(28/98)

High Yield Bond –$26.8B
(42/98)

Large Value –$50.0B
(14/98)

Large Value –$46.6B
(14/98)

Mid-Cap Growth –$84.8B
(6/97)

Small Growth –$42.1B
(7/83)

World Large Stock –$1.7B
(43/98)

Europe Stock –$5.7B
(74/98)

Mid-Cap Value –$7.6B
(22/98)

Balanced –$18.0B
(28/98)

Mid-Cap Growth –$36.6B
(9/98)

High Yield Bond –$39.0B
(50/98)

World Large Stock –$81.6B
(21/97)

Int Government –$10.6B
(52/83)

Japan Stock –$1.3B
(65/98)

Diversified EM –$5.1B
(86/98)

Japan Stock –$5.7B
(80/98)

Mid-Cap Value –$15.9B
(20/98)

Health –$35.9B
(32/98)

Mid-Cap Value –$30.6B
(19/98)

Large Value –$61.1B
(13/97)

Muni NY Long –$7.7B
(55/83)

Mid-Cap Value –$1.2B
(23/98)

World Large Stock –$4.8B
(28/98)

Large Growth –$5.6B
(13/98)

Europe Stock –$11.0B
(54/98)

High Yield Bond –$30.7B
(44/98)

Small Growth –$30.0B
(8/98)

Small Growth –$38.8B
(5/97)

Muni CA Long –$6.6B
(49/83)

Cmdty Broad Basket –$1.1B
(72/98)

Cmdty Prec Metals –$4.1B
(90/98)

High Yield Bond –$4.6B
(39/98)

Health –$5.9B
(15/98)

Mid-Cap Value –$24.3B
(17/98)

World Large Stock –$15.2B
(21/98)

Mid-Cap Value –$34.2B
(15/97)

Muni Single St. Long –$6.2B
(65/83)

Large Blend –$0.9B
(15/98)

Japan Stock –$3.4B
(77/98)

World Large Stock –$4.6B
(32/98)

Mid-Cap Growth –$4.6B
(8/98)

World Large Stock –$23.9B
(19/98)

EM Local-Cur Bond –$10.6B
(86/98)

Muni NY Long –$11.4B
(47/97)

Muni Single St. Int –$5.8B
(69/83)

Latin American Stock –$0.9B
(97/98)

Mid-Cap Value –$3.0B
(18/98)

Cmdty Prec Metals –$3.1B
(87/98)

Utilities –$4.0B
(55/98)

Europe Stock –$19.9B
(49/98)

Utilities –$7.1B
(27/98)

Muni CA Long –$7.1B
(36/97)

Mid-Cap Value –$5.6B
(15/83)

Europe Stock –$0.9B
(84/98)

Financial –$2.9B
(25/98)

Financial –$2.7B
(69/98)

World Large Stock –$3.7B
(21/98)

Small Growth –$12.7B
(5/98)

Natural Resources –$6.9B
(76/98)

Muni Single St. Long –$6.1B
(60/97)

Muni PA –$3.5B
(62/83)

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

Notes: The table above 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 August 2018

Leaders
1-month inflows 3-month inflows12-month inflows
Volatility12.7%Volatility18.7%Misc. Sector65.7%
Trading-Inverse Cmdty.12.0%Long Government16.5%Trading-Inverse Cmdty.63.7%
Trading-Inverse Equity6.6%Trading-Levgd. Debt13.1%Long Government55.9%
Misc. Region 5.3% Ultrashort Bond 12.3% Ultrashort Bond 42.1%
Ultrashort Bond 5.0% Trading-Levgd. Cmdty. 11.2% China Region 27.0%

 

Laggards
1-month outflows3-month outflows12-month outflows
Cmdty. Energy–13.2%Cmdty. Ind. Metals–19.8%Cmdty. Energy–61.6%
Latin America Stock–9.1%Cmdty. Energy–18.1%Trading-Levgd. Cmdty.–42.7%
Cmdty. Ind. Metals–6.4%Latin America Stock–13.7%Single Currency–20.6%
Trading-Levgd. Cmdty. –6.1% Single Currency –10.2% Managed Futures –15.2%
Long-Short Credit –3.7% Trading-Inverse Cmdty. –9.9% Europe Stock –14.3%

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 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 $21.0 trillion as of December 31, 2017.

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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