Lipper Equity Income Funds (EIEI) suffered their fifteenth largest weekly outflow on record during the Lipper fund flows week ending March 22, 2023. Their $1.5 billion in net outflows was the largest since December 2021, bringing their four-week moving average outflow to the largest level since June 2018—the eleventh largest four-week outflow average on record.
During 2022, Lipper Equity Income Funds realized a record year in terms of inflows, attracting $47.8 billion in net new capital. Their second-largest calendar year intake was during 2011, bringing in $30.9 billion.
Why the change of attitude?
February was the largest monthly outflow (-$1.7 billion) since July 2020, and March is looking like it will top that with four straight weeks of outflows. Year-to-date numbers have the classifications shedding $5.1 billion already!
When interest rates are on the rise, asset prices tend to decrease. Investors move away from the growth issues that forecast much of their profits into the future and toward stable cashflows. Just last week central banks increased their interest rates once again. The Federal Reserve increased the rates by 25 basis points (bps), its ninth rate hike since last March, moving the Federal Funds Rate from 0% to a range of 4.75% to 5.25%. The goal, as we all know, is to fight inflation. Fed Chair Jerome Powell, taking his lead from previous Chair Paul Volcker, has stated he will raise rates even though it may lead to a recession.
This historic rate hike has led to companies reevaluating the assets on their balance sheets as unrealized losses became realized thanks to liquidity and duration issues in the banking system. As Warren Buffett so eloquently put it, “Only when the tide goes out do you discover who’s been swimming naked.”
Powell did come out and state that “the U.S. banking system is sound and resilient,” however market participants may be thinking this is the end of the rate hiking cycle and time to refocus on assets that may have taken a severe price cut. The tech-heavy Lipper Large-Cap Growth Funds attracted $1.8 billion in new money last week, its largest intake this year and only its third week of inflows year to date. The classification is on pace for its first monthly inflow in four months, which would be its second monthly inflow in the last eight.
Has the U.S. economy already reached a point where it now has to pause or even lower interest rates? And who will be the biggest benefactor and loser in the coming months? Early signs are pointing at Equity Income Funds suffering the most, at least in the near term.
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