I’m forever blowing bubbles
Pretty bubbles in the air
They fly so high, nearly reach the sky
Then like my dreams they fade and die
[Originally written in 1919 by Jaan Kenbrovin (James Kendis, James
Brockman, and Nat Vincent) and John William Kellette]
Lipper’s Global FundFlows 2013 year-end report on trends in mutual fund data has been produced.
It was a year of solid growth for the global mutual fund industry. Overall, mutual fund assets were up US$2.7 trillion net, with US$2.2 trillion of the increase being due to the rise in equity funds’ assets under management (AUM). One-third of the total mutual fund AUM increase for 2013 was estimated to come from net sales, with two-thirds coming from performance. Most types of funds recorded decent sales for the year, especially equity, mixed-asset, and alternatives funds.
Table 1. Global Mutual Fund Estimated Net Flows and AUM (US$Bil)
Only commodity funds and money market funds suffered net losses for the year, with the demise of gold being particularly notable. During 2013 it lost almost a third of its year-end 2012 value.
Does this mark the end of the safe-haven asset, the store of value? Are new bubbles forming in the equity, interest, and currency markets? If so, will any of these deflate in 2014 as gold did in 2013? The rapid response of today’s markets to changes in sentiment is keenly reflected in the 2013 data, and investor demand appears to fuel prices beyond real intrinsic asset value.
To highlight what a good year 2013 was for general mutual fund performance, one needs only to look at the Lipper Global Classification indices: 374/449 peer group averages recorded positive cumulative performance for the year, with a range of values between positive 80% and minus 40%.
Table 2. Frequency Distribution, LGC Indices, 2013–Total Return (%)
The Global FundFlows report reveals the most popular strategies by estimated net sales for 2013. Globally diversified strategies attracted capital. U.S. equities performed well across the board, and this attracted investor purchases of U.S.-focused funds. Developed markets coming out of recession scored above emerging-market strategies, perhaps artificially buoyed by monetary policy. New absolute return and alternative strategy funds sold well as did income and high-yield funds in a low-interest-rate environment.
China, India, and Asia Pacific funds were all out of favour with investors. Corporate bond funds and commodity funds also saw net reimbursements for the year.
The winners of 2013 were undoubtedly the large U.S. fund promoters. That was where most of the new money went in terms of flows, market share, and AUM growth. The overweighting of U.S. market share, now tending to be almost 60% of all AUM, may be looked upon as a growing systemic risk to the global funds industry. This might be even more concerning when one considers the current state of the country’s financial health in terms of debt and ability to pay. There is no doubt the U.S.’s approach to solving the recession has been far more generous than Europe’s, for example, providing the impetus for U.S. growth in 2013. But, as the policymakers take their foot off the accelerator, will the tortoise then plod past the hare? Let’s all hope the hare doesn’t have a heart attack!