US equity fund outflows rise above $20bn for the year
Big withdrawals at start of pandemic have seen many investors miss out on market rally
US equity outflows for the week to Wednesday have brought the amount withdrawn from stock funds in 2020 to more than $20bn, illustrating investors’ caution over re-entering the market after a sell-off this year.
The $3.2bn in redemptions from mutual funds and exchange traded funds over the past week brings the amount investors have put back to work since the stock market rally began in March to $17bn. That is just over a third of the $45bn that was withdrawn between the market peak in February and the start of the rally five weeks later, according to data from EPFR Global.
The rapid exit from US stocks as the coronavirus pandemic hit financial markets means many investors have missed out on much of the rally that has added 45 per cent to the value of the S&P 500 since late March, bringing the benchmark above the level at which it began the year.
“It’s really easy to go to cash when you’re scared but it’s almost impossible to come back out at the right time,” said Liz Young, director of market strategy for BNY Mellon Investment Management.
The increase in valuations may also make it hard for investors to find undervalued corners of the market to put money to work, she said. “The big tech names and the sectors that have driven the rally so far are not going to look as attractive.”
Investor caution has increased the appetite for safer parts of the fixed-income market. US investment grade corporate bond funds had $1.6bn in inflows for the week, pushing the amount of new money that has flowed into the funds above $50bn this year.
The inflows helped push the yield on investment grade debt below 2 per cent this week for the first time, according to an index from Ice Data Services.
“Even as corporate bond yields hit new all-time lows, dropping below 2 per cent for the first time ever, the demand backdrop for credit looks strong,” said Shobhit Gupta, head of US credit strategy for Barclays. “After outflows in March and early April, inflows to credit funds have remained elevated despite declining yields given the lack of more attractive alternatives.”
Investors have pointed to the recent drop in real yields on US Treasuries, which measure bond returns once the effects of inflation have been stripped out, as a signal that the Federal Reserve will continue to be supportive of financial markets for the foreseeable future.
The Fed has already rebuffed the idea that it will raise interest rates any time soon and in recent public appearances officials have hinted at the need for additional stimulus. Some investors think new policies could be announced as early as the central bank’s meeting next week.
Additional support from the Fed could provide a boost to equity markets, investors say, pouring fuel on the recent rally.
“Fixed-income valuations are even less attractive than stock valuations,” said Ms Young. “If we get a vaccine you’ll see a steepening of the yield curve and another huge move from cash into equities.”