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September 14, 2018

Despite Strong Equity Market Returns, Investors Have Turned to Safe-Haven Plays YTD

by Tom Roseen.

For the Lipper fund-flows week ended Wednesday, September 12, 2018, investors took their collective foot off the pedal as they focused on the escalating trade-war rhetoric between the U.S. and China and the large currency declines for Argentina and Turkey.

For the second week in three investors were net redeemers of fund assets (including those of conventional funds and ETFs), withdrawing $3.3 billion. Fund investors padded the coffers of taxable fixed income funds (+$2.4 billion) but were net redeemers of money market funds (-$3.8 billion), equity funds (-$1.8 billion), and municipal bond funds (-$136 million).

While year to date the broad-based equity indices have posted some handsome returns, with the NASDAQ returning 15.22%, the Russell 2000 Index returning 11.73%, the S&P 500 Index posting an 8.05% return, and the Dow Jones Industrial Average gaining 5.17%, trade and geopolitical concerns have caused many investors to take a risk-off approach to investing.

Interestingly, fund investors have injected some $39.5 billion net YTD into government-Treasury funds (consisting of the Lipper classifications below), in line to be the largest one-year net inflows into this group on record. Despite learning that wage growth in the recently released nonfarm-payrolls report for August had accelerated (often considered to be a precursor to inflation and generally a drag on fixed income fund valuations), investors continued to pad the coffers of Lipper’s Short U.S. Treasury Funds (+$14.1 billion net), Inflation-Protected Securities Funds (+$11.6 billion), and General U.S. Treasury Funds (+$13.8 billion) classifications.

With some market pundits stating that U.S. equity valuations are on the rich side, the trade-war rhetoric weighing on emerging markets, and the dollar strengthening against many of the major foreign currencies, many investors have turned to traditional safe-haven plays in this time of uncertainty. YTD they have padded the coffers of government-Treasury funds (+$39.5 billion net) and Ultra-Short Obligation Funds (+$35.7 billion), while continuing to pad old favorites such as Core Bond Funds (+$38.3 billion), Loan Participation Funds (+$15.1 billion), and International Income Funds (+$11.7 billion).

So, despite the strong YTD returns for equities, we continue to see taxable bond funds (+$115.7 billion net) handily outdrawing equity funds (+$59.4 billion). Investors are taking a more cautious stance, with the most recent bull market’s advance being in its ninth year—the longest bull market since World War II.

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