Market Meltdown and Fund Flows | The Corona Correction | Refinitiv

Video Transcription:

  Market Meltdown and Fund Flows | The Corona Correction | Refinitiv

Welcome to the Corona Correction Series in association with Refinitiv, I'm your host, Roger Hirst. One of the best way ways to analyse market emotions is by following fund flows, and that's investor money coming into and out of various types of asset class. I asked Tom Roseen, the head of U.S. Research Services at Refinitiv Lipper, to shed light on the major trends in recent fund flows and whether we've seen investors participate in the recent rebound. What we've basically been seeing is really a meltdown in the market as well. And so while we've had a tough time, I know all of us would expect to see a meltdown in the market, we saw that equity funds for the quarter, first quarter 2020, we saw equity funds decline about 22.2, 22.33 percent. That's the largest decline that we've seen in equity funds since at least the Q4 2008. So I know that we all expected this, but again, it came on so all of a sudden. The economics were going great, the U.S. had a 3.5 percent unemployment rate, that's probably jumped over 10 percent in just a month's time. And also, one of the bigger things that we saw that we all as investors depend on, is we saw fixed income funds take it on the chin, down about 4.56 percent for the quarter, now that's a monster amount for a fixed income volume. Most of us had seen it as a kind of a safe haven play. And this was not just the Covid response, but it also I think all of us recall that Russia and Saudi Arabia disagreed with having a decline in oil output, and they were starting to get into a pricing war. So not only do we have a decline in oil prices because of the pricing war, but all of a sudden the world stopped using oil. This has been a very big time for us as investors, and particularly for the mutual fund industry as well. I believe they're actually starting to get a little bit more comfortable with putting money to work. As I told you, we are 22.33 percent return on equity funds. But the week before, if we take a look at the actual returns for a prior week, which have been not this past Friday, the Friday before, we saw a 12 percent return. By markets standards here in the U.S. and what's amazing about that is we haven't seen that type of return since 1974 for a one week return. So the investors were a little bit more confident once they heard that governors here in the United States were considering, along with the President, were considering starting at least a soft opening of the economy. And then we also heard that the number of cases globally, and in the United States, have started to decline as far as number of occurrences. And also, the death rate is starting to slow down a little bit. So I think that was a big boon for investors as well. So here's what happened. Here's what we saw from that. We saw that money markets actually, one of the big stories here is money markets took in record amount of money. We saw that money market funds took in six hundred and eighty seven billion dollars for Q1. This is by far one of the largest money market inflows that we've ever seen. But what we saw is a continuation for the weekend at April 15th, and I'm flipping weeks around on you guys a little bit, but from Wednesday - Wednesday basis is when we do fund flows. This is where we estimate how much money is coming in and going out of the market for mutual funds. For the week ended April 15th 2020, we saw that money market funds took in forty six point eight billion, a huge amount again. But what was comforting in actually showing that people are starting to take their foot off the break a little bit, equity funds took in about $5 billion, we saw fixed income funds take in about $10.3 billion. And then we also saw municipal bond funds taking in about $833 million. Prior to that, we had only seen seven weeks of outflows. And I'm not talking small outflows. I'm talking monster outflows. So really, I do think that the average investor out there, ETF or even professional investors, are putting their toes in the water trying to test what actually is going to happen. So they're not jumping in full feet, but they're testing the waters and I think they're feeling much better about it. This is going to be kind of a rip on the fund industry. And what I mean by rip on the fund industry, it's going to be a really heavy road to haul for them. And the reason is they went from having assets under management of about $25.8 billion or a trillion dollars here in the United States. And in that one quarter's time, it dropped to $22.9 trillion. So they saw $3.2 trillion leave in one quarter. And it wasn't from flows, it was because of what I was telling you about before, the 22.33 percent decline in the market and outflows as well. So, again, I think this is going to take a while for the dust to settle and to see if profitability is back on track. But certainly while you and I as investors have taken it on the chin, the folks running the funds are going to struggle for a bit as well as they try to get that asset level back up and match the costs with revenues coming in. Well, perhaps it's not shocking that given the magnitude and speed of the sell off in equities, that the equity market had its worst quarter for outflows since 2008. But the significant outflows from fixed income however, is a bit surprising, though this reflects the need to unlock capital in order to pay for margin calls and the destruction of wealth in other assets. And risk parity style funds were also deleveraging across the board. And asset managers also saw a mammoth decline in assets under management of 3.2 trillion dollars in North America, from both outflows and equity market weakness. And the battle between active and passive styles, will again hot up, in order to take the lion's share of those future flows. Perhaps the key question is, what will happen to the $700 billion of capital that has moved into the safe haven of money market funds? Currently these funds are still seeing inflows, though at a slower pace. Their reallocation into risky assets will have a major influence on future asset price performance. We'll see you later with another update.