Q1 2022 Cash Flows: March Buyers Bring April Sellers?


2021 ended with double-digit stock returns for the sixth year in a row. In a quarter of 2022, there is clearly a lot of ground to catch up.

The S&P 500 (^SPX) and Bloomberg US Aggregate (^BBUSATR) are off to a rocky start… A rally in stocks at the end of the first quarter petered out in early April, and the indices are now at 9.5% and 10.0% lower, respectively, on the year-to-date.

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Last year, Fixed Income and Money Market led all fund categories in terms of net new assets. At the start of 2022, investors shifted gears and seemingly tried to “buy the dip” – first quarter equity fund inflows topped $119.2 billion. Unfortunately, stocks continued to dive.

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What does the fund flow data say about investor sentiment heading into the second quarter of 2022? Will everyone who “bought the dip” at the start of the year be rewarded in the months to come? And how will they react to continued volatility, rising inflation, rising interest rates and further geopolitical turmoil?

So far, it looks like March buyers have turned into April sellers…

Funds flow are net cash inflows into a fund (purchases) or net outflows from a fund (redemptions). Regardless of fund performance, when a mutual fund or ETF has positive cash flows (or net issues for ETFs) over a period of time, then the managers of that fund have more cash to buy more securities. The reverse is also true: when fund holders sell stocks, fund managers sell their positions and use the cash to pay for redemptions.

This means that fund flow data may indicate higher or lower demand for different types of assets, depending on which funds and categories are seeing relatively large inflows or outflows.

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Mutual Fund Flows: Biggest Gainers and Biggest Losers

Bank loan mutual funds continued to attract investor interest, raising $17.9 billion this quarter and $43.9 billion in asset inflows over the past year. Bank loan funds are believed to be better suited to rising rate environments, as their payments can float based on prevailing interest rates.

Investors sought diversification through World Bond-USD Hedged, the quarter’s biggest mutual fund gainer with $29.4 billion in positive flows. But excitement over a buying opportunity in early March sparked asset flows totaling $22.4 billion into Large Blend mutual funds.

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While money market mutual funds were the most popular in 2021, the first quarter of 2022 put an immediate end to this trend: almost a third of money market flows last year were drawn from these funds, for a total of $164.8 billion.

The US bond market was also affected this quarter. High Yield Bond, Intermediate Core-Plus Bond and Multisector Bond mutual funds lost investor confidence with combined net outflows of $46.7 billion, potentially a reaction to higher rates and lower prices obligations.

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ETF Feeds: Biggest Gainers and Biggest Losers

Commodity ETFs were investor favorites in the first quarter of 2022, a quarter in which they generated $12.5 billion in net new assets in the category. Considering that commodities were the only major asset class with positive returns in the first quarter, and that they proved to be an effective hedge against inflation, this seems to have been a smart short-term move.

Again, investors weren’t too concerned about weak equity returns at the start of the year, as Large Blend and Large Value ETFs raked in $39.8 billion and $36.6 billion in the first. trimester.

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Seeking to mitigate risk, investors avoided the sensitivity of high yield bonds to rising rates and resulted in negative net asset flows of $12 billion for the category. Consumer cyclical and foreign big growth also fell out of favor as other hard-hit categories in the first quarter, losing $4.1 billion and $1.9 billion in net assets, respectively.

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Flow and performance of equity-style funds

The table below shows a sum of the combined flows of mutual funds and ETFs, as well as the average category performance, for the nine equity-style boxes.

Consistently across all market cap sizes, investors abandoned growth funds amid the lowest performers. Growth posted returns of -9.8%, -11.3% and -11.9% year-to-date for large, mid and small caps, respectively.

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While Large Cap Value stood out as the winner of the first quarter performance, although up only 1.3%, investors were not sold and instead directed $62.2 billion of net asset traffic to Large Cap Blend funds, despite the category’s return of -3.8%.

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Asset loses momentum in Q1 as liability continues to be favored in 2022

As has been the case for some time, investors have strongly favored passive ETFs over active mutual funds. $132.8 billion was bought up by actively managed funds, the “biggest loser” this quarter, and passive ETFs swelled by $174.4 billion.

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With the Fed raising rates in mid-March in hopes of controlling rising inflation, things don’t look set to slow down any time soon. To protect their investments, investors have sought refuge from inflation via commodity-focused funds like the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC) and First Trust Global Tactical Commodity Strategy ETF (FTGC ), which raised $2.3 billion and $1.7 billion. in asset entries, respectively.

Meanwhile, investors withdrew $5.2 billion from iShares iBoxx $ High Yield Corp Bond ETF (HYG) in the first quarter of 2022. High-yield corporate bonds are usually the first to disappear during the reduction risks, and given the second quarter of 2022, a brief reversal towards the 10 -2 Year Treasury Yield Spread, investors may be trying to protect their portfolios against the recession before it is too late.

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Stock flows soar, but investors try to mitigate risk in Q1

“Risk” activity was in full swing in the first quarter as investors bet on “buying the dip”. The S&P 500’s disappointing year-to-date run doesn’t appear to pose a threat to their mood, but only time will tell if investors will regret these early moves.

Rising inflation, market volatility and geopolitical uncertainties continue to pose major risks to investors’ portfolios, none of which appear to be under control or even foreseeable in the near future. Commodities look promising as nearly every other asset class started 2022 in the red, but can they extend their run into Q2 and beyond?

This article originally appeared on YCharts.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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