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July 1, 2016

U.S. Fund-Flows Report: Surprise Brexit Leave Vote Pushes Investors to Money Market Funds

by Pat Keon, CFA.

Lipper’s fund macro-groups (including both mutual funds and exchange-traded funds [ETFs]) took in $16.4 billion of net new money for the fund-flows week ended Wednesday, June 29. This large net-inflow number was almost entirely attributable to money market funds (+$25.1 billion) as investors put money on the sidelines to wait out the uncertainty caused by Great Britain’s voting to leave the European Union. Municipal bond funds contributed to the overall inflows with their thirty-ninth straight week of gains (+$716 million), while equity funds (-$6.8 billion) and taxable bond funds (-$2.6 billion) both recorded significant net outflows.

The “Brexit” vote also created volatility in the markets during the week. The S&P 500 Index was up 1.3% in trading the day before the vote as Wall Street bet the U.K. would vote to stay in the EU. The markets reacted in shock the next morning after the leave vote was confirmed overnight, and the S&P 500 shed 5.3% over the next two trading days. But the story did not end there; ever-resilient investors bought on the dip, and the index appreciated 3.5% during the last two trading days of the fund-flows week. This roller-coaster ride resulted in an overall 0.7% loss for the index for the week. As investors looked to safe havens, Treasuries and gold reaped the benefits. The yield on the ten-year Treasury fell to 1.41% at one point (a four-year low and just above the record low of 1.38%), while gold was up roughly 6% during the two trading days after the vote, hitting a two-year high.

The majority of the overall net outflows from equity funds came from ETFs (-$4.1 billion), but mutual funds were not much better off (-$2.8 billion). As would be expected after the Brexit vote the overwhelming majority of the negative flows from mutual funds came from nondomestic equity funds (-$2.5 billion). On the ETFs side SPDR S&P 500 (SPY, -$7.9 billion) was the main contributor to the net outflows.

All of the net outflows from taxable bond funds came from mutual funds (-$4.1 billion), while taxable bond ETFs posted a gain of $1.6 billion. On the mutual fund side—in a risk-off strategy in light of the Brexit vote—the majority of the net outflows came from lower-quality fund categories. Funds in Lipper’s High Yield Funds classification had the largest net outflows (-$1.8 billion), while Loan Participation Funds saw roughly $600 million leave. For ETFs the results were contradictory to the mutual fund data, with iShares iBoxx $HY Corp (HYG, +$1.0 billion) having the largest net inflows for the week.

Municipal bond mutual funds extended their positive-flows streak to 39 weeks, taking in $649 million of net new money this past week. Funds in the High Yield Muni Debt Funds (+$373 million) and General and Insured Muni Debt Funds (+$169 million) classifications contributed the most to the week’s net inflows.

Money market funds (+$25.1 billion) benefited as investors sought to wait out the uncertainty in the markets caused by the U.K.’s voting to leave the EU. The largest net inflows for the week belonged to funds in Lipper’s Institutional U.S. Government Money Markets Funds (+$22.6 billion) and Institutional U.S. Treasury Money Markets Funds (+$8.5 billion) classifications.

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