The Markets August 18, 2008

Weak Equity, Bond Markets Produce Q108 Declines

Mutual fund assets worldwide decreased 5.1% to $24.81 trillion at the end of the first quarter of 2008—the first quarterly decline in nearly four years, according to Investment Company Institute (ICI).
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According to ICI data, the decline was due in part to weakness in equity and bond markets worldwide and in part to non-reporting by one country.

Net cash flow to all funds increased to $394 billion in the first quarter, up from $382 billion in the fourth quarter of 2007. Long-term funds experienced net outflows of $93 billion in the first quarter, compared with a net inflow of $131 billion in the fourth quarter.

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Bond fund net flows actually strengthened, with a net inflow of $13 billion worldwide in the first quarter compared with a net outflow of $29 billion in the fourth quarter.

This was more than offset by weakened net flows for equity funds and balanced/mixed funds, which combined had an outflow of $147 billion in the first quarter compared with an inflow of $126 in the fourth quarter. Inflows to money market funds increased substantially, with $487 billion in inflows in the first quarter of 2008 compared with $250 billion in the fourth quarter of 2007.

Hong Kong did not report data for the first quarter of 2008, with $818 billion in assets in the fourth quarter of 2007; the absence of Hong Kong data accounted for 61% of the decline in worldwide mutual fund assets in 2008 first quarter.

On a U.S.-dollar-denominated basis, long-term fund assets decreased but money market fund assets increased. Assets of equity funds fell 14.8%, with $10.6 trillion in assets at the end of the first quarter of 2008. Balanced/mixed fund assets declined 5.2% and bond fund assets declined 1.3% in the quarter. Assets of money market funds increased 13.2% to $5.6 trillion at the end of the first quarter.

The full data is available here.

Data & Research August 18, 2008

Advisers See Light at End of Tunnel

They aren’t jumping up and down about the market conditions, but independent advisers think we’ve seen the lowest point, according to a Schwab Institutional study.
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The semiannual survey of registered investment advisers (RIAs) found that the group is more optimistic about the economy than earlier this year (see RIAs Much Less Optimistic about the Economy than Last Year). More than half (58%) said they expect the S&P 500 to rise by the end of the year compared with the less than half (46%) who thought so in January, according to a release of the study results.

Other signs of optimism since January included more advisers who expect energy prices to decrease in the next six months (57%), and a higher approval rate of Federal Chairman Ben Bernanke (back up to 71% from 61% earlier this year), according to the study.

Cautious Coaches

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Despite their increased optimism, most (77%) advisers still called the current market environment difficult, the results found, and nearly half of advisers (49%) said their clients have requested more conservative investments this year.

“No one thinks today’s market conditions are easy,’ said Bernie Clark, senior vice president of Schwab Institutional, in the release. “But advisers are known for their long-term perspective. They see a light at the end of this tunnel and are leading their clients toward it.’

Clark said that affluent investors in today’s market environment are less comfortable managing money on their own and are continuing to turn to independent advisors for trustworthy advice. “Advisors describe their role as quarterback or coach, and they’ve been in tough games before,’ he said. “This time, they are playing an increasingly proactive role—more than half say they have increased the frequency of client phone calls and are providing their clients with more education on the market.’

Many independent advisers report gaining new business from larger firms during this tumultuous time. In fact, 85% of advisers report winning new clients from full-service brokerage firms in the past six months. The respondent said clients were either seeking more personal advice or lost trust in their previous firm.

Divided Strategies

There is no clear-cut strategy among advisers in the current environment, as almost the same number plan to invest more in cash (22%) as those that plan to invest less (23%). More advisers since January are looking to invest in U.S. small cap equities (22%), but a similar percentage intend to invest less (19%), according to the results.

The study also found that 21% of advisers plan to invest more in international large cap equities in developed markets over the next six months, and 20% plan to invest more in fixed income over the next six months. Advisers identify the top three vehicles in the next six months as ETFs, REITs, and mutual funds that employ hedging strategies.

Probably not surprising, the largest number of advisers see energy as the top performing sector in the next six months (at 38%). Technology and health care were tied close behind at 33% apiece.

Ranking number one for advisers as the developed international market for the next six months is Hong Kong, the study found. For the number two slot, Singapore was replaced by our neighboring country to the north—as Canada has “steadily been gaining in popularity among advisers,’ according to the release.

More than 1,000 RIAs with $208 billion in total assets under management participated in The Independent Advisor Outlook Study in July.

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