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Fund Investors Will “Run”? Sorry, Charlie Brown

By Sean Collins and Sarah Holden

March 7, 2018

For decades, Charles Schulz kept us in suspense: surely this time, Lucy would let Charlie Brown kick the football. Nope. Every time, at the last second, she pulled the ball away—and Charlie Brown fell flat on his back.

We’ve seen the same gap between wish and fulfillment around market turmoil and mutual funds. For decades, commentators have predicted that investors in stock and bond funds, faced with market turmoil, would redeem en masse, perhaps adding to the market turmoil. Despite plenty of opportunities, that just hasn’t happened—but like Charlie Brown, the press and pundits don’t give up. Next time, they argue, fund shareholders will flee the market and redeem heavily. And Lucy will let Charlie Brown kick the football.

Stock market turmoil in February provides yet another example of this.

From November 2016 to January 2018, the stock market rose sharply, posting a total gain of 34 percent. Stock market volatility, as measured by the volatility index (VIX), remained quite subdued. In fact, it trended down a bit.

That changed in early February. Reflecting concerns that inflation could jump, perhaps leading to tighter-than-expected monetary policy, the stock market dropped sharply and volatility jumped. From February 1 to February 8, the S&P 500 index fell nearly 9 percent. The VIX nearly tripled, to a level not seen since August 2015. During the remainder of February, the stock market fluctuated.

How did fund investors react? Last month, our colleague Shelly Antoniewicz reviewed the response of investors in exchange-traded funds (ETFs), and showed that it was quite muted.

What about investors in domestic equity mutual funds? Their response was even more subdued. During the week ended February 7, investors redeemed $15.2 billion on net from such funds, amounting to just 0.19 percent of their assets as of January 31 (see Figure 1, below). During the following week, investors in these funds redeemed another 0.02 percent. In short, despite the stock market’s “sound and fury,” mutual fund investors carried on about their business.

FIGURE 1

Weekly Flows to Domestic Equity Mutual Funds
Percent of previous month-end assets*

*Previous month-end assets are based on the month prior to the Wednesday when the week ends.

Source: Investment Company Institute

As ICI has frequently noted, this is pretty standard behavior for fund investors. We’ve nevertheless received a number of inquiries about why fund investors reacted so modestly in the face of considerable market turbulence. There are likely a range of factors.

First, fund investors are typically in it for the long term. In 2017, 92 percent of mutual fund–owning households cited saving for retirement as a reason they invest in funds. Fully 75 percent cited saving for retirement as their primary reason for investing (see Figure 2, below). Because these shareholders have investment horizons that can be years to decades long, they can stay the course when markets are unsettled.

FIGURE 2

Primary Financial Goals Cited by Mutual Fund Investors
Percentage of US households owning mutual funds, 2017

Source: Investment Company Institute

Second, fund shareholders understand that investing poses a tradeoff between risks and returns. For example, 34 percent of mutual fund–owning households indicate a willingness to accept substantial or above-average investment risk. Another 46 percent state they are willing to accept average investment risk.

Third, many fund investors continue to purchase fund shares whether markets are rising or falling. Most notably, 401(k) plan investors frequently make additional fund purchases once or twice a month directly out of their paychecks. These plan participants tend to maintain their periodic 401(k) contributions through thick and thin. For example, an ICI survey of defined contribution (DC) plan recordkeepers found that during the financial crisis, 96 percent of 401(k) plan participants continued to contribute to their plans.

Fourth, investors make financial plans, often with the help of professional advisers. These plans may cover a range of considerations, such as asset allocation, saving for and investing in a home, job income, risk tolerance, and age—as well as the possibility that markets could drop. During February’s market turmoil, several publications reported that financial advisers were allaying clients’ concerns by reminding them that they have financial plans and that it makes sense to stick with those plans, even when markets are volatile.

Finally, many fund investors may have taken steps to limit their exposure to a market downturn before February 2018. No, fund investors were not especially prescient. But many investors—again, often with the help of an investment professional—periodically rebalance their portfolios to help mitigate investment risk. In a year when stock prices rise sharply, rebalancing can mean selling some stocks and buying some bonds.

In 2017, US stock market indexes rose 20 to 25 percent, far outperforming the US bond market, which returned about 4 percent over the year. Rather than simply directing their flows to the category with the highest returns, investors instead responded by redeeming $50 billion from domestic equity funds and adding a record $381 billion into bond funds. As a result, fund investors may have felt less need to react when the stock market fell in February 2018.

Doubtless, various other factors also contributed to fund shareholders’ equable reaction to stock market volatility in February. Whatever the underlying causes, February events provide yet another illustration that the hypothesis that fund investors “run”—or redeem en masse in response to unsettled markets—simply doesn’t fit the facts.

Granted, despite all evidence to the contrary, one can never rule out the possibility of such an event. And Lucy just might let Charlie Brown kick that football.

Sean Collins is chief economist and Sarah Holden is senior director of retirement and investor research at ICI.

Permalink: https://www.ici.org/viewpoints/view_18_charlie_brown
 

TOPICS: 401(k)Bond FundEquity InvestingFinancial MarketsFinancial StabilityInterest RateInvestor ResearchMutual FundRetirement ResearchTrading

Pointing Fingers at Index Funds Won’t Explain Market Volatility

By Shelly Antoniewicz

February 14, 2018

With all the recent volatility in the US stock market, two questions are frequently being asked:

  • Are fund investors fleeing the stock market?
  • Are index funds causing market turbulence?

The short answer to both questions is no.

Experience and research show that investor flows to and from mutual funds and exchange-traded funds (ETFs) tend to track market returns. ...

Read more…

TOPICS: Equity InvestingExchange-Traded FundsFederal ReserveFinancial MarketsFinancial StabilityIndex FundInterest RateInvestor ResearchMutual FundTrading

Average Expense Ratios for Index ETFs Have Declined

By Shelly Antoniewicz, Sean Collins, James Duvall, and Morris Mitler

May 24, 2017

In yesterday’s ICI Viewpoints post, we noted that our annual report on the asset-weighted average expense ratios of funds—“Trends in the Expenses and Fees of Funds, 2016”—showed that expenses for long-term mutual funds continued to decline in 2016.

Read more…

TOPICS: Bond FundEquity InvestingExchange-Traded FundsFixed IncomeIndex FundInterest RateMutual Fund

Average Expense Ratios for Long-Term Mutual Funds Continued to Decrease in 2016

By Morris Mitler and Sean Collins

May 23, 2017

ICI recently released its report on the expense ratios of mutual funds: “Trends in the Expenses and Fees of Funds, 2016.” This is ICI's first report that also summarizes expense ratios for exchange-traded funds (ETFs). 

Read more…

TOPICS: Bond FundEquity InvestingExchange-Traded FundsFederal ReserveFixed IncomeInterest RateMoney Market FundsMutual Fund

The Taper Tantrum—Take II

By Shelly Antoniewicz

December 13, 2016

Long-term interest rates in the United States have been on the rise since summer 2016—slowly creeping up from July through October, and then jumping after the presidential election. Thus far, the response from bond mutual fund investors has been subdued. Nevertheless, various commentators—from the vice chairman of the Federal Reserve Board to the multinational Financial Stability Board—have expressed concerns that bond fund investors may rush to redeem shares to avoid portfolio losses stemming from unexpected increases in interest rates.

Read more…

TOPICS: Bond FundBondsFederal ReserveFinancial MarketsFinancial StabilityFixed IncomeFund RegulationInterest RateMutual FundTreasury

Matching Models to Reality: Bond Market Investors Don’t Follow the “First-Mover” Script

By Brian Reid

July 18, 2016

Fourth in a series of ICI Viewpoints testing the hypotheses of academics and regulators about mutual fund and investor behavior during times of market stress.

Regulators and researchers have put forward a common narrative that fund investors can destabilize markets during a period of market stress. They have advanced several hypotheses—including the concept of a first-mover advantage—to support their narrative. These hypotheses produce testable predictions about how fund investors behave in troubled markets: not only will investors redeem their fund shares but they also will stop purchasing new fund shares, thus creating large destabilizing net outflows from funds.

Read more…

TOPICS: Bond FundBondsFederal ReserveFinancial MarketsFinancial StabilityFixed IncomeInterest RateMutual Fund

Matching Models to Reality: In a Falling Market, the Real “Movers” May Be...the Buyers

By Brian Reid

July 15, 2016

Third in a series of ICI Viewpoints testing the hypotheses of academics and regulators about mutual fund and investor behavior during times of market stress.

 

Read more…

TOPICS: Bond FundBondsFederal ReserveFinancial MarketsFinancial StabilityFixed IncomeInterest RateMutual Fund

Matching Models to Reality: The Real-World Challenges to Regulators’ “First-Mover” Hypothesis

By Sean Collins

July 14, 2016

Commentators have long predicted that, one of these days, a market downturn will send U.S. mutual fund investors racing for the exits.

Read more…

TOPICS: Bond FundBondsFederal ReserveFinancial StabilityFixed IncomeInterest RateMutual Fund

A Changing Landscape for the Fund Industry—and Fund Investors

By Rob Elson

May 27, 2016

Continue to expect change in the investment landscape, with the Federal Reserve, the Millennial generation, and technological evolution all playing major roles.

Read more…

TOPICS: EventsFederal ReserveFinancial MarketsGMMInterest RateMutual Fund

The “Waterfall Theory” of Liquidity Management Doesn’t Hold Water

By Sean Collins and Chris Plantier

March 9, 2016

In a series of recent blog posts, economists at the Federal Reserve Bank of New York have discussed new research assessing the potential for bond mutual funds to pose systemic risks.

Read more…

TOPICS: Bond FundBondsFederal ReserveFinancial MarketsFinancial StabilityFixed IncomeInterest RateMutual Fund

New Research by New York Fed Confirms: Bond Funds Don’t Pose Systemic Risks

By Chris Plantier and Sean Collins

February 23, 2016

In a series of recent blog posts, economists at the Federal Reserve Bank of New York discussed results from a theoretical model assessing the potential for bond mutual funds to pose systemic risks.

Read more…

TOPICS: Bond FundBondsFederal ReserveFinancial MarketsFinancial StabilityFixed IncomeInterest RateMutual Fund

High-Yield Bond Mutual Fund Flows: An Update

By Sean Collins

December 23, 2015

In an ICI Viewpoints on December 16, we debuted new weekly data on flows to high-yield bond mutual funds, presenting data through December 9. In light of continuing developments in the high-yield market, we have had requests to provide an update this week, taking into account the flows through December 16. Here is our overview.

Read more…

TOPICS: Bond FundBondsFinancial MarketsFinancial StabilityInterest RateMutual FundTrading

High-Yield Bond ETFs: A Source of Liquidity

By Shelly Antoniewicz

December 22, 2015

The high-yield bond market has been buffeted recently, as market participants reassessed the risks of this sector and sent prices for many such bonds tumbling.

Read more…

TOPICS: Bond FundExchange-Traded FundsFinancial MarketsFinancial StabilityInterest RateMutual FundTrading

High-Yield Bond Mutual Fund Flows: Some Perspective

By Sean Collins

December 16, 2015

Recent conditions in the high-yield credit markets have raised questions about the impact of market turmoil on mutual funds investing in that segment of the bond market.

Read more…

TOPICS: Bond FundBondsFinancial MarketsFinancial StabilityInterest RateMutual FundTrading

SEC Chair White Affirms Agency Has Tools to Address Risks in Industry

By Rachel McTague

May 8, 2015

The U.S. Securities and Exchange Commission (SEC) has the tools it needs to address systemic risks to the extent they exist in the asset management industry, said SEC Chair Mary Jo White at the opening session on the final day of ICI’s annual General Membership Meeting (GMM). White also announced that David Grim—who had been serving as acting director of the SEC’s Division of Investment Management—has just been named director of the division. White said she is thrilled that Grim, a 20-year veteran of the SEC in the investment management area, is taking the reins at a time when the Commission is moving forward to implement proactive regulations for the industry.

Read more…

TOPICS: BondsCybersecurityEuropeEventsExchange-Traded FundsFederal ReserveFinancial MarketsFinancial StabilityFund RegulationGMMGovernment AffairsInterest RateInternationalMutual FundShareholderTreasury

More Unfounded Speculation on Bond ETFs and Financial Stability

By Shelly Antoniewicz and Mike McNamee

April 13, 2015

A recent column in the Financial Times warns of “another accident in waiting” in the growth of fixed-income exchange-traded funds (ETFs)—described as “financial alchemy” that converts illiquid bonds into “baskets” that “trade moment to moment on the stock exchanges.” This “illusory” ETF liquidity will disappear, the author warns, when investors “want to move en masse, and quickly, when the going gets less good.”

Read more…

TOPICS: Bond FundBondsExchange-Traded FundsFinancial MarketsFinancial StabilityFixed IncomeInterest RateTrading

Once Again, Information Moves Markets

By Sean Collins

March 18, 2015

Treasury yields fell sharply today and the stock market jumped. Wouldn’t it be nice if mutual funds could take credit? Unfortunately, they can’t. Any orders that mutual fund investors place to buy or sell shares anytime today before 4:00 p.m. won’t hit the market until 4:00 p.m., just like any other day. And, if you are reading this blog post at the time of its posting, 4:00 p.m. is still 10 minutes away.

Read more…

TOPICS: Bond FundFederal ReserveFinancial MarketsFinancial StabilityInterest RateMutual FundTrading

Bloomberg Ignores the Evidence on Bond ETFs

By Mike McNamee

September 26, 2014

In response to “Pimco ETF Probe Spotlighting $270 Billion Market Vexing FSB,” we posted the following comment on Bloomberg News’ website:

Read more…

TOPICS: Bond FundBondsExchange-Traded FundsFederal ReserveFinancial MarketsFinancial StabilityFund RegulationInterest RateInternationalTrading

The Real Lessons to Be Learned from 1994’s Bond Market

By Brian Reid

July 29, 2014

A recent “Heard on the Street” column in the Wall Street Journal (“Heeding 1994's Bond-Market Lesson,” July 27, 2014) is correct in saying that there’s a lesson to be learned from the 1994 bond market—but it draws the wrong lesson.

Read more…

TOPICS: Bond FundBondsFederal ReserveFinancial MarketsFinancial StabilityFixed IncomeFund RegulationInterest RateMutual FundRetirement ResearchSavingsTradingTreasury

“Market Tantrums” and Mutual Funds: A Second Look

By Sean Collins and Chris Plantier

May 19, 2014

Over the past year, policymakers who are focused on financial stability have pursued a theory that mutual fund investors can destabilize financial markets by redeeming from funds when markets decline. According to this theory, redemptions by fund investors lead fund managers to sell securities; those sales drive asset prices down further and, in turn, spur more investor flight, redemptions, and price declines.

Read more…

TOPICS: Bond FundBondsFinancial MarketsFinancial StabilityFixed IncomeFund RegulationInterest RateInvestor ResearchMutual FundTradingTreasury

ETFs Don’t Move the Market—Information Does

By Shelly Antoniewicz

March 11, 2014

There they go again.

Read more…

TOPICS: Bond FundBondsExchange-Traded FundsFinancial MarketsFixed IncomeInterest RateTrading

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