The Markets April 13, 2011

Institutional Investment Managers Anticipate Inflation Risk

Approximately 70% of institutional investment managers believe that the risk of inflation will increase over the next six months, according to a Northern Trust survey.
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A majority of managers (62%) expect market volatility (as measured by the VIX Index), to increase over the next six months. Responses on both questions were at their highest points since the Northern Trust survey began in the third quarter of 2008.Twenty-six percent of the managers increased their portfolio exposure to commodities during the first quarter, a possible result of the increasing expectations that inflation is set to rise over the next six months.   

More than half of those surveyed believe that oil prices will continue to rise over the next six months, with 90 percent of managers expressing the view that increased oil prices will negatively impact economic growth.  

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The survey found managers remain positive regarding U.S. market valuations. The majority (58%) stated that the U.S. equity market, as measured by the S&P 500 Index, is undervalued. However, there was a decrease in the number of managers who believe that corporate earnings will increase over the next three months, from 80% in the fourth quarter of 2010 to 69% during the first quarter of 2011.  

Looking at Japan following the March 11 earthquake and tsunami, two-thirds of managers surveyed believe Japanese equities are undervalued. There was also an increase from previous quarters in the degree of perceived undervaluation, as 31% of managers see more than 10% upside in Japanese equities – a 12% rise from the previous quarter.

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Institutional Investment Managers More Risk-Averse  

A quarterly survey conducted by Northern Trust finds that 36% of institutional investment managers are more risk-averse compared to last quarter when just 20% expressed this view.Portfolio concentration levels remained largely unchanged for the quarter relative to the fourth quarter of 2010.  Roughly 66% of managers stated that their portfolio concentrations were the same as last quarter, while 21% stated that their portfolios were more concentrated, down slightly from 24% last quarter. Thirteen percent of managers stated that their portfolios were less concentrated, a slight uptick from 11 percent last quarter.    

The survey also found 42% of managers think that home prices will decline over the next six months, an increase of 10 percentage points over the prior quarter.  Investment managers cited technology, energy, industrials, emerging markets, and health care as the top five most attractive market segments respectively. The percentage of managers that believe emerging markets are undervalued rose slightly from 39% in the fourth quarter of 2010 to 43% during the first quarter of 2011.      

The survey of approximately 88 institutional managers was conducted by NTGA in mid-March. All respondents participate in NTGA's external manager platform and are utilized in investment products including mutual funds, separate accounts, emerging manager programs and other investment solutions.
The Markets April 13, 2011

ETF Flows Pick up Pace in March

Although the pace of flows into U.S. exchange-traded funds (ETFs) has decelerated in the past several months, March saw the pace pick back up, Morningstar Direct reports.
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According to the Morningstar Direct Fund Flows Update, ETF inflows rose to $7.4 billion from $6.6 billion a month prior.U.S. stock ETFs saw an aggregate $3.3 billion outflow in March. The lion’s share of those outflows came from the large-blend and growth categories of the style box, which saw $6.2 billion and $963 million in outflows, respectively.  

Last month’s U.S. stock exodus was led by SPDR S&P 500 SPY, which claimed a $5.7 billion dollar outflow. Morningstar said many of the big names in broad index exposure followed suit, with iShares S&P 500 Index IVV, PowerShares QQQ QQQ, and SPDR Dow Jones Industrial Average ETF DIA bleeding $1.2 billion, $751, and $628 million, respectively.  

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Flows for U.S. stock were not, however, all outgoing. Morningstar data shows lateral movement within the asset class, as investors shifted into more narrowly targeted exposure. By category, equity energy, natural resources, consumer discretionary, and consumer staples attracted the largest flows. They accounted for $654 million, $579 million, $362 million, and $349 million, respectively. 

International Stock carried the day, realizing a net $6.7 billion inflow after facing $508 million and $3.3 billion outflows in January and February, respectively. At $2.8 billion, iShares MSCI Japan Index EWJ saw the largest quarterly inflow of any U.S. ETF. Vanguard MSCI Emerging Markets ETF VWO claimed the largest monthly ETF inflow in March--$1.83 billion in total.  

Over the last seven months, flows into the taxable-bond space have been meager at best. That said, last month saw the space make a healthy contribution to aggregate ETF inflows, collecting roughly $3.1 billion in total. The largest inflow within the space was claimed by iShares Barclays 1-3 Year Credit Bond CSJ, which saw a $334 million inflow, and followed closely by iShares iBoxx $ High Yield Corporate Bond HYG.  

Given recent performance, the commodities ETF space realized a mild outflow, around $218 million. However, according to Morningstar, there were several noteworthy points here. United States Natural Gas UNG bled just under $2.6 billion last month. Spot NG was down roughly 5.5% on quarter. 

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