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June 24, 2016

U.S. FundFlows Insight Report: Nervousness Ahead of the Brexit Vote Keeps Equity Investors at Bay

by Tom Roseen.

Despite some encouraging news on the economic front, investors remained on the defensive during the fund-flows week ended June 22, 2016. After digesting the Federal Reserve’s dovish comments stemming from its June FOMC meeting and ahead of the U.K.’s “Brexit” vote during the week, investors appeared to hunker down and take a wait-and-see approach. The most recent Brexit polls from the U.K. showed a referendum too close to call, with 45% of the respondents favoring ditching the European Union, while 44% preferred to stay.

Even though initial jobless claims rose during the week, investors were placated somewhat by news that the Philadelphia Fed’s manufacturing index showed some improvement in June, posting its second positive reading in ten months, and that the index of home builder sentiment rose to its highest reading in five months. However, the ever-looming Brexit referendum cast a pall over the markets, exacerbated by the fact that the Federal Reserve, the Bank of England, and the Bank of Japan each raised concerns about the possible impact the upcoming referendum might have on the global economy. The U.S. markets remained nervous over the possibility of the U.K. leaving the EU, amplified by the Fed’s reluctance to raise rates, focusing on lingering economic uncertainties. Safe-haven plays took a roller-coaster ride during the week as investors prepared for the worst, with the yen, gold, and government securities gaining some traction until the end of the flows week. The yield on the ten-year Treasury remained near historical lows at 1.69%. Near-month crude oil prices remained below the $50/barrel mark, weighing on energy stocks, as investors turned their attention back to oversupply issues. A smaller-than-expected decline in U.S. crude supplies was reported by the U.S. Energy Information Administration. Even a 1.8% rise in May existing-home sales to a seasonally adjusted annual rate of 5.53 million wasn’t enough to entice investors to take a stronger risk-on stance ahead of the Brexit vote on June 23.

For the third consecutive week fund investors were net sellers of fund assets (including those of conventional funds and exchange-traded funds [ETFs]), withdrawing a net $1.0 billion for the fund-flows week. While investors were net sellers of equity funds (-$6.1 billion), they padded the coffers of taxable bond funds (+$2.5 billion), municipal bond funds (+$1.4 billion), and money market funds (+$1.2 billion).

For the first week in five equity ETFs witnessed net outflows, handing back $4.3 billion. As a result of increasing global market uncertainty, authorized participants (APs) were net redeemers of nondomestic equity ETFs (-$4.3 billion), withdrawing money from the group for the second consecutive week; however, for a fifth week running domestic equity ETFs attracted net new money, this past week to the tune of only $8 million. SPDR S&P 500 ETF (+$771 million), SPDR Gold Trust (+$616 million), and VanEck Market Vectors Gold Miners ETF (+$304 million) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum iShares MSCI EAFE ETF (-$1.2 billion) experienced the largest net redemptions, while Deutsche X-trackers MSCI EAFE Hedged Equity ETF (-$463 million) suffered the second largest net redemptions for the week.

For the fifteenth week running conventional fund (ex-ETF) investors were net redeemers of equity funds, redeeming $1.8 billion from the group. Domestic equity funds, handing back a little more than $2.6 billion, witnessed their twentieth consecutive week of net outflows, but they posted a weekly performance gain of 0.73% (for their fourth week in five of plus-side returns). Meanwhile, their nondomestic equity fund counterparts, posting a 3.05% gain for the week, witnessed net inflows (+$0.8 billion) for the first week in five. On the domestic side investors lightened up on large-cap funds and equity income funds, redeeming a net $1.7 billion and $486 million, respectively. On the nondomestic side global equity funds witnessed $734 million of net outflows.

For the second week in three taxable bond funds (ex-ETFs) witnessed net inflows, taking in a little over $1.7 billion. Balanced funds witnessed the largest net inflows, taking in $2.0 billion (for their first week in three of net inflows), while corporate investment-grade bond funds witnessed the second largest net inflows (+$1.3 billion, for their twelfth week of net inflows) of the macro-group. Corporate high-yield funds witnessed the largest net redemptions of the group, handing back $0.8 billion for the week. For the thirty-eighth week in a row municipal bond funds (ex-ETFs) witnessed net inflows, taking in $1.3 billion this past week—their largest net inflows since the week ended January 16, 2013.

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