* Long Fear — So far this year bond funds globally have benefited from largestvinflows since 2012 ($266bn or 4.4%AUM). Additional demand for bonds has been coming from central banks. This is despite historically low bond yields in most parts of the world. Investors, it seems, are prioritising capital protection in their allocation.
* Short Hope — Equity funds globally are on track to register net annual outflows for the first time in four years (-$224bn or -1.7%AUM). Annualised, this would be a bigger net outflow than the previous record in 2008. Global equity fund flows are part of our bear market checklist as a contrarian indicator. Current outflows are not outright bullish, although equity markets performed well following previous big net outflows, but certainly are not bearish either.
* Takeaway #1: EM Inflows, Europe Outflows — EM equity funds are on track for their first year of net inflows since 2012 ($13bn or 1.3% of AUM). Alternatively, DM funds have suffered from redemptions of $237bn (-2.2% of AUM). Within DM equity funds, the largest outflows so far this year have been from European and US funds.
* Takeaway #2: US Equity Gains Despite Outflows — EM equity market performance has the strongest traditional coincident relationship with flows. The US has the weakest. Tobias Levkovich highlights that corporates are a bigger buyer of US equities via buybacks than investors via fund flows. This might explain why the US equity market has managed to go up this year despite large outflows.
* Takeaway #3: Shift From Active To Passive — There has been an ongoing shift from active funds into passive equity funds. The rise of passive investing may help explain the structural increase in pairwise correlations within equity markets. However, this “passive markets mean more correlated stocks” story has not really worked in recent years.