Positive 2015 Fund Flows Despite Sluggish December
New data from Strategic Insight shows long-term mutual funds
and ETFs attracted $158 billion of net new investment in 2015, despite $40
billion of outflows in December.
Strategic Insight’s (SI) monthly
fund product flow reporting for December 2015 shows equity funds netted $113
billion during the year—with $203 billion of inflows to international equity
offsetting $90 billion of net redemptions from U.S. stock funds.
According to SI, assets in equities,
hybrid products, and alternatives totaled $10.1 trillion by year-end 2015.
During the year, $44 billion of inflows to fixed-income strategies was split
between taxable ($24 billion) and tax-free ($20 billion) bond fund products.
“Monthly flows to taxable bond funds
were mixed during the year before outflows accelerated at year-end, with $28.2
billion of net redemptions in December,” SI explains. “As of December 2015,
assets in bond funds totaled $3.7 trillion.”
Calendar-year returns for major U.S. stock indices were also
mixed for the year, and as a result average U.S. equity fund returns were
relatively flat, at -0.55%. International stock indices were mostly
negative on the year, SI finds, as international equity strategies in aggregate
averaged -3.30%. Tax-free bond funds, on the other hand, led calendar year
returns among broad asset classes, generating a 3.03% average return.
Net deposits to money market funds totaled $35 billion in
December, SI concludes. With annual net intake of $15.5 billion, money market
assets totaled $2.6 trillion as of December 2015.
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Managing director of AB’s alternatives and multi-asset arm
offers helpful reminders amid rocky markets—most notably, that volatility is
normal and actually a key source of opportunity.
Before taking on the role of managing director leading AB’s
Alternatives and Multi-Asset Group, Richard Brink’s career focused primarily on
building fixed-income portfolios.
It was enjoyable work, he tells PLANADVISER, and it’s also
given him an interesting perspective into the way investors react to increasing
risk and volatility in the markets—as they currently are.
“I think the one blanket statement to make regarding the
current market environment is that bouts of volatility, while uncomfortable in
many respects, are actually normal from a historical perspective,” Brink
explains. “It’s the previous five years of really smooth returns that were somewhat abnormal.
We saw remarkably consistently growth characterized by central bank
policies essentially pre-paying people for future returns, based on the promise
of future economic growth and the support that would come with it.”
U.S.-based equity markets in particular saw really strong average
returns, Brink says, with the S&P 500, for example, climbing 17% on average
per year between 2010 and 2014. Perhaps more important than the strong top-level
growth was the fact that widely different asset classes had all continued to perform
well, boosted as they were by easy global monetary policy, Brink adds. This
meant low dispersion and high inter-market correlation across regions and
economies, giving investors a deep sense of comfort and security with the
markets that lasted for years and soothed lingering fears from the financial crisis.
Simply put, the last quarter of 2015 and the rocky start to
2016 have really shaken that confidence and corrected people’s understanding of
the way markets work, Brink says. “Suddenly winners and losers have reemerged in
the equity markets,” fueled not by the actions of market-overseers or regulators
but instead by the fundamental cyclical and systemic factors. This implies greater and
greater asset class dispersion and single-stock dispersion in coming years, Brink predicts.
NEXT: Tailwinds for
alternatives?
With all this in mind, Brink still has no problem describing
the current market environment as rife with opportunity, both for individual
investors and their advisers.
“The opportunity is still out there to find strong
performers and to build portfolios that are very strong from a risk-versus-reward perspective,” he notes. “As an adviser, you do actually have to be able to
identify and pick the winners, however. It’s an environment in which the boats
are more important than the tide, if you want to say it that way.”
“For advisers, this will mean the notions of relative value
capture and downside value protection will really be front and center in client
conversations,” Brink notes. “This, in turn, means advisers are looking for new modules, tools and strategies around
alternatives products due diligence, for example—that’s one area of focus for
us. They’re looking for new ways to help investors in alternatives portfolio construction.”
Like others familiar with the intricacies of defined
contribution (DC) plan investment menus, Brink feels alternatives will best
serve investors in a “behind-the-scenes type approach.”
“This is one of the interesting parallels between the
fixed-income work I used to do and the alternatives work I focus on now,” Brink
concludes. “Oftentimes, the investments that do the most good for an average
investor’s portfolio are not necessarily going to be easy to understand or use correctly,
so it’s probably going to be important to have them packaged, say in a
target-date fund or through some other pre-diversified vehicle. Otherwise the
opportunity to make mistakes and overlook really important nuance is strong. Alternatives
are clearly in this camp.”