Let the Good Times Flow, Just not into Bonds

Eric Platt at The FT has reported fascinating fund flow data for the year.  Global fund flows increased 1000% during 2017 to $650bn.  Once again bond funds have edged out equities with $350bn of the share.  That means at least half of global fund investors should be bitterly disappointed with pathetic returns in a year where global stocks have their mojo working.  Encouragingly the fund flow gap has finally closed between bond and stock investors.  Are bond devotees finally realizing that a circa 2% upside with unlimited downside is not a good trade when the world is on the up.  Of course, bonds still provide essential diversification benefits and are your best friend when risk is turned off but that’s not 2017 and not the expectation for 2018.

Equity fund flows continue to shift from active mutual funds to passive ETFs.  Stock Mutual funds suffered $153bn of redemptions while equity ETFs added $448bn in a year where active showed better performance.  Curiously, active bond manager’s edged passive bond ETF flows by $60bn.  Are investors generally willing to pay for active bond management but not for equities, what are they hoping for?

The rest of the world is back.  International flows dramatically improved in the past twelve months.  In European equity funds captured $39bn in 2017 after $100bn of redemptions in 2016.  Emerging markets fared even better counting $61bn in equity fund flows.  That tracks better global economic performance but also highlights how fickle international flows can be justifying our emphasis on accumulation in international markets over dramatic re-allocations.

Animal spirits are stirring once again supported by a synchronized global acceleration in economic activity.  There remains several trillion on the sidelines that could be put to better use in a generally constructive capital market environment.  That bodes well for the coming year as we sunset 2017.

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