Q1 2023 Fund Flows: Recession Apprehension Drives Money Market Flows
A market reversal and continuation of macroeconomic trends have punctuated the start of 2023. The Federal Reserve completed its ninth straight rate hike in an effort to tame inflation, which came in at 5% as of March 31st, the same level as it was in May 2021. The S&P 500 and Bloomberg US Aggregate rebounded from double-digit losses in 2022. And despite a spike during the Silicon Valley Bank crisis, the VIX has stayed relatively tame during the first three months of the year.
One of the most significant impacts of the Fed’s hawkish agenda has been investor preference toward parking their money on the sidelines, evidenced by the whopping $439B that flowed into Money Market funds during the first quarter of the year.
Fund flows are the net cash inflow into a fund (purchases) or net outflow from a fund (redemptions). Irrespective of fund performance, when a mutual fund or ETF has positive fund flows (or net issuances for ETFs) in a given period, that fund’s managers have more cash to buy more holdings. The opposite is also true: as fundholders sell shares, fund managers sell out of positions and use the cash to pay redemptions.
This means that fund flow data can indicate higher or lower demand for different asset types, depending on which funds and categories have relatively large inflows or outflows.
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In contrast to its mutual fund counterpart, Ultrashort bond ETFs saw a $15.9B influx of new assets. This could be due to various factors, like ETFs’ advantageous tax and fee structure or the flexibility, liquidity, accessibility, and transparency ETFs provide.
The table below shows a summation of combined mutual fund and ETF fund flows, plus average category performance, for the nine equity-style boxes.
Despite equities producing muted-to-impressive returns, assets have still flowed out of equity funds. This is especially true for the growth space, which saw over $26B of outflows combined, despite growth’s outperformance across all style boxes. This likely suggests that cost-cutting initiatives and subsequent returns to start the year have not been enough to attract investors back to the space.
In an environment where investors can get additional yield on their dollar without taking on significant risk, equity prices or returns will likely have to become more attractive for investors to regain confidence in these assets.
Investor Caution Grows as Outflows Hit High-Performing Sectors
Investors still seem wary of an economic downturn as significant outflows hit some of last year’s highest-performing sectors, including Healthcare and Energy. With other places to park their money, investors may be hedging their bets against potential recessionary risks in different asset classes to start the year.