Traditional Assets or a Credible Alternative?

The latest edition of Lipper’s Global Fund Market Statistics, reporting on September-end data, has been released. In it we take a closer look at estimated net flows, market share, and assets under management (AUM) statistics. These data are aggregated from literally hundreds of thousands of mutual funds in the Lipper database, grouped by asset type, sector, domicile, and more.

The big picture shows that global mutual fund AUM rose to US$27 trillion–a seemingly large monthly rise of 3.5% from August to September. However, most of this value increase can simply be attributed to currency movements.

Significantly, the greenback depreciated against other major currencies during the month of September: down 4.7% versus the U.K. pound, down 3.1% versus the Swiss franc, and down 2.7% versus the euro.

Table 1. AUM (US$ Bil)

Source: Lipper

The overall rise in assets can’t hide the fact that September was quite a poor month for overall net sales of mutual funds: some US$92 billion of net outflows were recorded:

Table 2. Estimated Net Flows (US$ Bil)

Source: Lipper

Traditional equity fund and bond fund assets were casualties, either ditched by investors altogether or replaced by diversified Alternatives, with Real Estate, Commodity and Mixed-Asset funds all recording net inflows. Drilling down into the Lipper Global Classifications (see Table 3) we see that for the second month in a row Money Market USD topped the net sales table with US$32 billion. Equity Europe again sold well with US$6 billion, following the large gains of August. The latter indicated that not all growth investors were running to the exit, perhaps seeing Europe as very good value versus Equity UK and Equity US, which both recorded net outflows once again.

On the income side there was a lot of sales evidence to suggest that investors are still very afraid of rate increases. (This is understandable when you consider that in the U.S., U.K., and Europe there is only one direction these can move: upward.) Other popular net-selling sectors revealing the latest income strategies were: Bond USD Short-Term, Equity US Income, and Bond USD High Yield. The latter observation appeared to suggest that some investors are taking the view that lower rates will persist for some time yet.

Table 3. Hot Sectors—Estimated Net Sales (US$ Bil)

Source: Lipper

Another large net-selling sector was Lipper’s relatively new Alternative Credit Focus peer group. The constituents of this sector mainly employ long/short credit strategies that offer diversification in fund-of-fund portfolios by hedging against the risk of rising rates (many aim for duration neutrality). These funds still offer exposure to higher credit risk and the associated attempt to maintain a higher level of income in a persistently low-rate environment.

The Alternative Credit Focus sector merely mirrors the more general success of Alternatives mutual funds over the last five years. Flows were positive and steady throughout the period. One interesting and revealing fact in the report is that sales of these Alternatives funds were not exactly generated by any obvious performance driver. This is demonstrated by Table 4, which records the change in assets excluding estimated net flows. These data thus provide a generalized performance indicator of the underlying funds, albeit being broad based and money weighted. It is clear from these figures that Alternatives funds are about something other than pure growth potential. That “something” might be diversification, protection, or insurance, or it could just be because they allow investors to access investments that weren’t easily accessed before. Call it what you will–it looks like a new ace up the sleeve of the mutual fund investor for when things go wrong in the conventional world.

Table 4. Change in Assets, Excluding Estimated Net Flows (%)

Source: Lipper