The Investment Company Institute (ICI) is a national association of U.S. investment companies, including mutual funds and exchange-traded funds (ETFs), that publishes information on the amounts of dollars being invested in both mutual funds and ETFs by all types of investors. The monthly ICI aggregate report provides interesting insight into how investors at large are placing their investment dollars. The table below provides a snapshot of fund flows for this past January with Mutual Fund flows listed first, Exchange Traded Funds (ETFs) second, and the combined totals third:
Despite all of the angst and volatility in equity markets during January, investors still ADDED almost $8 bln to stock funds and withdrew $400 mln from the safety of fixed income funds. Furthermore, asset flow into emerging markets, one of the trigger points for the market panic, was POSITIVE!
Why did this happen?
One possible answer is provided by Josh Brown, the brain behind the brilliant blog The Reformed Broker, in his recent article "The Relentless Bid, Explained" he starts with the following observation:
“You hear it all the time these days – ‘there is a relentless bid underneath this market just waiting to buy every single dip’ and you can’t really argue with the statement itself…The dips have become shallower and the buyers have rushed in more quickly each time. Sell-offs took months to play out during 2011 – think of the April-October peak-to-trough 21% decline for the S&P. In 2012, these bouts of selling ran their course in just a few weeks, in 2013 a few days and, thus far in 2014, just a few hours…It’s rather extraordinary.”
He then works through how the behemoths of financial wealth management industry have shifted from a transaction based business model to a fee-based model:
“Wells Fargo brokerage account AUM is now 27% fee-based, Morgan Stanley’s is 37% and 44% of Merrill’s Thundering Herd has more than half its assets oriented that way. The nation’s largest traditional advisory firms have accelerated their push toward fee-based management and away from transactional brokerage. This has a huge impact on how the money itself is managed and this in turn greatly affects the behavior of the stock market…These wirehouses, along with JPMorgan and UBS, have slightly less than half of the wealth management pie in America. Registered Investment Advisories (RIAs) have almost another 25% (the fastest growing channel by far) and they are almost completely fee-based…That’s 75% of the wealth business in this country being largely driven toward fee-based strategies and accounts.”
His conclusion focuses on how the industry is now incentivized not by short-term transaction churning but by the long-term buying and holding of financial assets that increase over time for clients who are living longer:
“What this means for the very character of the stock market and the way it behaves is very important. It means that, almost no matter what happens, each week advisors of every stripe have money to put to work and they’re increasingly agnostic about the news of the day. They’ve all got the same actuarial tables in front of them and they’re well aware that their clients are living longer than ever – hence, a gently increased proportion of their managed accounts are being allocated toward equities. And so they invariably buy and then buy more.”
A brilliant observation about the future of wealth management and conveniently explains wacky fund flows in January.
Source: The Investment Company Institute | Citigroup Research