While equity markets are off to a fast start in 2013 up over 5% after a 13% increase for the S&P 500 in 2012, a bull market in stocks is being mentioned from many directions. However when looking at fund flows which are driven by market returns as investors chase performance, the bond bull market over the past year has been much more impressive than the run in stocks.
According to the Investment Company Institute (ICI), the past 13 months have shown a clear dichotomy in investment flows from investors in the mutual fund channel. The All Bond category, according to the ICI, which includes both taxable bonds and tax-free municipals had net inflow of over $336 billion, as the bull market in fixed income entered its 4th year after all markets bottomed in 2009. Bonds returns and hence fixed income flows have been spurred by strong returns for both Treasuries and corporate credit as the Fed has kept benchmark rates very low and has pursued Quantitative Easing (whereby the Fed acts as a buyer in the fixed income markets). Quantitative easing has kept buying pressure on all types of bonds. The substantial inflow into bonds has partly been bolstered by outflows in equity mutual funds, as the ICI has reported over a $131 billion outflow in its All Equity category in the last year, which includes both domestic and international equity funds.
While equity mutual funds have undergone a bigger secular market share loss to exchange traded funds (ETFs) versus bond mutual funds, it is none-the-less striking to see the stark contrast in investment flows. As outlined in our article A turn higher in fund flows would benefit BEN, TROW, and JNS, if the persistent decline in equity fund flows reverses, then Franklin Resources (BEN), T Rowe Price (TROW), and Janus (JNS) would benefit with leading equity franchises in the asset management industry. However, with current investor appetite still favoring fixed income, it is Legg Mason (LM), Franklin Resources, and Blackrock (BLK) that have the best and biggest bond franchises of the public asset managers. For those who are not aware, Franklin is split almost exactly down the middle with leading bond and equity mutual fund products.
While the Street has been discussing a “bond bubble” for the better part of 3 years, investment flow through January 2013 still points to a fixed income bias by investors. History tells us that investment flows will lead sentiment, so we will be watching these mutual fund stats carefully to determine when a shift happens.