The Markets October 24, 2013

Demand for Equity Strategies Sets Record Pace

Inflows to equity strategies remained strongly positive in September, clocking in at $40 billion for equity mutual funds and ETFs.
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The pace brings net intakes for the first three quarters of 2013 to $332 billion, according to research from Strategic Insight, an Asset International company. That means total inflows for 2013 could approach $400 billion, a figure that would surpass all prior records for equity flows.

“As we have projected, 2013 has been the year for stock funds and we anticipate that trends evidenced this year would accelerate in 2014,” said Avi Nachmany, cofounder and director of research at Strategic Insight.

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The September growth in equity strategies was matched by $5 billion of net redemptions from bond mutual funds and ETFs, leaving year-to-date net inflows for the category at $27 billion. Researchers called that the weakest demand for bond strategies seen in nearly a decade.

On the domestic equity mutual fund front, September saw $31 billion of inflows during the third quarter. Excluding ETFs, U.S. equity funds netted $12 billion in September, closing the third quarter with $61 billion of net inflows.  

Although September demand favored international strategies as developed European economies showed signs of improvement, quarterly net intake split nearly evenly between domestic and international categories. Researchers expect long-term equity mutual funds, excluding ETFs, to exceed $250 billion in annual net intake for 2013.

Not surprisingly, investor uncertainty over the Federal Reserve’s intentions to eventually start tapering its bond purchasing policies, coupled with federal and municipal fiscal issues, resulted in consistent net redemptions for both taxable and tax-free bond funds (excluding ETFs). Those worries translated to quarterly withdrawals of $50 billion—the hardest quarter on record for bond mutual funds.

Other figures published by Strategic Insight indicate U.S. equity ETP inflows—a distinction including both exchange traded funds and exchange traded notes—netted $12 billion during September. Investor desire for emerging markets and European exposures led to international equity inflows of $15 billion during the month.   

The report also described strong growth in intermediary-solid channels, a category which includes private bank, individual, independent, regional, registered investment adviser, and most wirehouse broker/dealers. Together these channels aggregately drove $194 billion of equity mutual fund and ETF inflows.

More information on Strategic Insight’s research is available here.

Data & Research October 24, 2013

Complexity Checks Alternative Investment Growth

The complexity of alternative investments prevents many financial advisers from advocating their addition to client portfolios, despite the diversity and volatility advantages alternatives can confer.
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So reports a new survey by Natixis Global Asset Management’s Durable Portfolio Construction Research Center, which sought to gather adviser insights on retirement savings, asset allocation strategies and the challenges posed by a rapidly aging client base.

According to the survey, called the 2013 Natixis Survey of U.S. Financial Advisors, only one in four (25%) advisers reported using alternatives such as hedge funds, private equity and commodities in client accounts on a regular basis. Among those not utilizing alternatives, 44% reported feeling alternative products are too difficult to explain to clients to warrant regular use.

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Also telling is the 74% of advisers who said they would support a requirement that sales materials for alternative strategies be “written in plain English.”

Underscoring the need for better understanding of alternatives, 69% reported they are seeking ways to replace traditional diversification and portfolio construction techniques with new approaches in order to achieve results—a significant increase from last year’s survey, in which 46% said the same. 

Looking beyond alternatives, the survey found more than half (56%) of advisers said it’s difficult to build portfolios that can simultaneously reduce risk and enhance returns. A similar number (53%) reported difficulty balancing drawdowns for retirees with the need to keep their portfolios growing.

On the participant side, less than half (47%) of advisers believe their clients know how much they need to save for an effective retirement.

Researchers called that a positive indicator, considering the 28% observed in 2012, but also warned that future retirees are generally underestimating the threat of uncovered or unexpected healthcare costs that can arise later in life.   

Another challenge identified by advisers in the survey is that an aging client base is taking away from time to prospect new business. In fact, advisers reported spending twice as much time on routine client service tasks as they do on developing new business—with 77% of existing clients now age 46 or older and 35% over age 67.

More on the survey’s findings and methodology available here.

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