News & analysis
ETFs highlight changing investor appetite Investors turn their back on momentum for value stocks
As one of the most liquid segments of the listed markets, the ETF industry is a litmus test of investor preferences…and they prefer safer assets.
The first tangible indicators of a change in demand for exchange-traded funds (ETFs) were recorded over the summer. De-risking in preparation for their endgame and rising fears of a trade war between the US and China, has seen global ETFs report their first out-flows in more than five years. In May, investors pulled some $4.5bn (£3.6bn) out of global equity funds, which reflected a similar decline in global equity indices. The S&P500 shrank -6.6% during that month while the MSCI World dived -6.1%. Simultaneously, bond ETFs reported $10.7bn (£8.6bn) of net in-flows, according to data spe- cialist ETFGI.
This trend has spread to the continent where promoters of European ETFs faced their first net out-flows in two years. European ETF flows throughout
September appeared an unremarkable month for global equities with the MSCI World climbing gradually by 0.21% during the month. But under the surface, a significant rotation took place with investors turning their backs on momentum stocks en masse and sud- denly favouring cheaper value stocks instead. In just three days, global momentum stocks plummeted by 10% while investors piled their cash into value stocks, which jumped by 7%. PE spreads between value and momentum stocks on the Russell 1000 index are now at their widest in 18 years. Value stocks, traditionally popular in a more upbeat economic environment, have underperformed momentum for the past 10 years. Does September’s “momentum massacre” point to a broader factor rotation?
An alternative explanation could be the fact that inves- tors are increasingly weary of some FAANG stocks, including Facebook and Netflix, whose value has risen sharply during the past couple of years and which now has to bear the brunt of investors’ caution.
Cash-strapped schemes dump risky assets as CDI takes centre stage
August showed a clear rotation away from equities and into fixed income. Equity ETFs reported €12.2bn (£10.7bn) of out-flows, while €3.3bn (£2.9bn) was moved into bond ETFs. This change in demand was more dramatic than the falls recorded in the underlying European equity indices. The FTSE100 had the weakest performance at -5% throughout August, however, other indi- ces reported only a marginal fall. The S&P500 fell -1.8%, the Dax by -2% and the CAC by -0.7%. The total number of assets invested in the European ETF industry fell by 2.2% to $890bn (£721.3bn) at the end of August, ETFGI says. Given that the European ETF market is dominated by institutional investors, it is perhaps not surprising that the fall in demand for equities tallies with a broader rotation of institutional money into bonds. Among UK institutional investors, domestic fixed interest government bonds and domestic inflation-linked government bonds are set to become the most popular asset classes, with about a third of investors planning to increase their exposure in the next year, according to Mercer’s asset allocation survey. Con- versely, 24% of investors plan to reduce their exposure to domestic equities and 16% want to reduce their investments in equities across the globe.
8 | portfolio institutional | October 2019 | issue 87
The volume of investments in cash-flow driven invest- ing (CDI) compatible assets has reached 54%, a near 10% increase in 18 months, according to RiskFirst. Simultaneously, investors have cut their equity expo- sure to around 47% from 55.4% at the beginning of 2018. This tallies with fund flow data from EFAMA, which shows that in July, in-flows into European bond funds increased by €12bn (£10.6bn) month-on-month to €39bn (£34.7bn), while European equity funds reported out-flows of €1bn (£890.9m). But the trend is more complex than a simple shift from equities to bonds. While buy-and-maintain credit con- tinues to constitute the cornerstone of investor portfolios, accounting for more than 60% of all CDI compatible assets, investors are also increasingly seek- ing to invest in infrastructure and private credit. One key driver behind growing demand is that more than 70% of UK defined benefit (DB) schemes are cash- flow negative and the vast majority are closed to further accrual. But shifts in the type of cash-flow matching assets that investors are seeking shows that growing risk aversion could also be a motivation.
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