People have been talking about the Great Rotation, the idea that everyone is going to pull their money out of bonds and put them into equities, at least since tapering was first announced, and while it’s easy to get carried away with such a catchy name, mutual fund and ETF flows show that investors really are losing interest in fixed income products.
Fixed income funds outflow
“While equity flows remain positive, fixed income funds recorded their fifth straight month of outflows. Money market funds had net outflows of $6B as flows remain volatile month to month,” writes BMO Capital Markets analyst David Chiaverini, discussing open-end U.S. mutual funds. ETFs told the same story with equity funds receiving $30 billion inflows last month and fixed-income ETFs having $3 billion in outflows.
BMO’s mutual fund price targets unchanged
For now, BMO is leaving its mutual fund price targets unchanged, but says there is upside risk if valuations keep their current high level. “AUM is tracking in line or above our published estimates owing to the strong market performance quarter to date. Through November 12, the S&P 500 is up 5.1% compared with our quarterly equity market appreciation estimate of 2%. If market valuations stay at or above current levels, we believe there is modest upside to our EPS estimates,” writes Chiaverini.
The increased interest in equities is no surprise at this point; even if valuations are too high investors are betting on continued recovery and overall market growth. But the outflows from fixed income products aren’t as large as the inflows to equities, and balanced funds are still seeing strong inflows as well.
The interest in mutual funds and ETFs trading in equities tells the same story as hedge fund inflows, which have been more impressive this year than performance seems to justify. In both cases, people are looking for ways to take part in what they think will be an ongoing rally without getting involved in stock picking. But as Chiaverini points out, not all fixed-income products are created equal, and products like Franklin Resource’s Global Bond Funds with a 1.5 year duration should be more popular than products that last five or more years.