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July 8, 2016

U.S. FundFlows Insight Report: Despite the Up Week, Fund Investors Duck for Cover

by Tom Roseen.

In spite of the “Brexit” vote, investors pushed the U.S. broad indices back into positive territory for the fund-flows week ended July 6, 2016, after reports indicated the European Central Bank and the Bank of England (BOE) will be more accommodative to shore up their economies. Britain’s exodus from the EU didn’t appear to be as bad as many had thought initially.

Early in the flows week BOE Governor Mark Carney indicated the central bank is prepared to ease monetary policy further to combat the expected slowdown caused by the Brexit vote, which led U.S. stocks to rise for a third consecutive day on Thursday, June 30, for their best three-day climb since February 17. On Friday the S&P 500 broke through the 2,100 level after the Institute of Supply Management said its manufacturing index jumped to 53.2 in June, pushing the Dow Jones Industrial Average and the S&P to their best weekly performance for 2016 so far. The week wasn’t without its pullbacks though. Investors appeared to duck for cover and bid up Treasuries, gold, and silver after the British pound declined to a 31-year low against the dollar. Oil prices weakened and the ten-year Treasury yield closed at a record 1.367% as investors took some of their hard-won earnings off the table, near-month oil prices fell below $47/barrel, and on news that U.S. factory orders fell 1% in May. However, a stronger-than-expected ISM manufacturing report and tame minutes from the Federal Reserve’s June meeting, confirming its dovish stance, helped equities finish off the flows week on an up note.

For the fourth week in five fund investors were net sellers of fund assets (including those of conventional funds and exchange-traded funds [ETFs]), withdrawing a net $30.6 billion for the fund-flows week, but the headline numbers were a little misleading. Investors padded the coffers of taxable bond funds (+$4.1 billion) and municipal bond funds (+$0.7 billion), while they were net redeemers of equity funds (-$1.4 billion) and money market funds (-$34.0 billion).

For the first week in three equity ETFs witnessed net inflows, taking in $4.6 billion. As a result of increasingly stronger U.S. equity returns, authorized participants (APs) were net purchasers of domestic equity ETFs (+$6.0 billion), injecting money into the group for the sixth week in seven. However, for the third week in four nondomestic equity ETFs were in net-redemptions mode, handing back $1.3 billion this past week. SPDR S&P 500 ETF (+$4.6 billion), SPDR Gold Trust (+$1.4 billion), and iShares Core S&P 500 ETF (+$654 million) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum Financial Select Sector SPDR ETF (-$0.9 billion) experienced the largest net redemptions, while iShares MSCI Eurozone ETF (-$770 million) suffered the second largest net redemptions for the week.

For the seventeenth week running conventional fund (ex-ETF) investors were net redeemers of equity funds, redeeming $6.1 billion from the group. Domestic equity funds, handing back a little less than $4.5 billion, witnessed their twenty-second consecutive week of net outflows, but they posted a weekly performance gain of 1.15% (for their second week in three of plus-side returns). Meanwhile, their nondomestic equity fund counterparts, posting a 0.21% loss for the week, also witnessed net outflows (-$1.6 billion) for a second consecutive week. On the domestic side investors lightened up on large-cap funds and mid-cap funds, redeeming a net $3.5 billion and $395 million, respectively. On the nondomestic side international equity funds witnessed $1.1 billion of net outflows.

For the second consecutive week taxable bond funds (ex-ETFs) witnessed net outflows, handing back a little under $1.0 billion. Corporate high-yield funds witnessed the largest net inflows, taking in $168 million, while balanced funds witnessed the second largest net inflows (+$141 million) of the macro-group. Corporate investment-grade bond funds witnessed the largest net redemptions of the group, handing back $513 million for the week, while flexible portfolio funds suffered the next largest net redemptions (-$477 million). For the fortieth consecutive week municipal bond funds (ex-ETFs) witnessed net inflows, attracting some $540 million this past week.

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