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How Do Fund Flows Affect Fund Performance?

A study by Morningstar acknowledges that the relationship between fund flow (or investors’ purchases and redemptions of mutual funds) and fund performance may be stronger than previously considered. However, the study based on three-year performance of stock-picking funds between 2006 and 2014 revealed that funds with high inflows, stood a lower chance of outperforming peers. Large-cap funds attracting most inflows had an average return of 7.8%. This compares unfavorably with funds with biggest outflows offering an average return of 8.1%. In many cases, outperformers tend to attract inflows. The strong rally may have run its course, leading to the tepid performance of those high inflow funds. Also, funds with massive inflows will have to employ the cash; otherwise the cash in net assets may swell and thus affect the fund’s allocation style. The positive on the other hand is that increased cash can help fund managers invest them in new stocks or financial instruments, without selling the existing portfolio. This in turn keeps the turnover ratio low. (To learn more about turnover ratio, click Does Turnover Ratio Influence Mutual Funds? ) Thus, fund flows may have an impact, but not necessarily in all cases. This is better explained in Pimco’s legal disclosures to the PIMCO Total Return Fund (MUTF: PTTAX ) investors. It says purchases or redemptions “may cause funds to make investment decisions at inopportune times or prices or miss attractive investment opportunities. Such transactions may also increase a fund’s transaction costs, accelerate the realization of taxable income if sales of securities resulted in gains, or otherwise cause a fund to perform differently than intended. While such risks may apply to funds of any size, such risks are heightened in funds with fewer assets under management.” Fund Category Performance with Highest Inflow & Outflow in August This year, the bleeding continues for funds and particularly for active funds. According to Morningstar data, open-end mutual funds saw outflows of $31.9 billion in August. Interestingly, not all fund categories that saw the largest outflows in August were in the red for August. Similarly, inflows did not necessarily mean that funds ended up in positive territory. Except for Europe stock funds, five fund categories that had the highest August inflows have posted year-to-date losses. In August, all these five categories finished in the negative zone. The magnitude of losses in August for categories with highest inflows was significantly larger than those categories that saw largest outflows. Categories with Highest Inflows in August ($ in Million) Total Return (%) August YTD August YTD Foreign Large Blend 11880 80302 -7.1 -0.8 Multi-alternative 1464 11145 -2.3 -1.3 Managed Futures 1122 6220 -2.7 -1.5 Global Real Estate 982 1644 -5.7 -4.5 Europe Stock 943 4218 -6.1 2.5 Categories with Highest Outflows in August ($ in Million) Total Return (%) August YTD August YTD Intermediate – Term Bond -6711 29175 -0.4 0.1 Large Value -3866 -22052 -6 -5.3 Multisector Bond -3484 1920 -1.1 -0.4 Large Growth -3337 -26518 -6.4 0.3 World Bond -3116 13711 -0.9 -3.1 Source: Morningstar Top & Bottom-Flowing Active Funds Below we present the list of top and bottom flowing active funds for August: Top Flowing Active Funds Net Inflow ($ in million) Performance (%) Aug-15 1 Year Aug-15 1 Year DoubleLine Total Return Bond Fund (MUTF: DBLTX ) 965 12245 -0.3 -1 PIMCO Income Fund (MUTF: PONAX ) 750 10659 -1.2 -4.2 Strategic Advisers Core Fund (MUTF: FCSAX ) 743 2549 -4.8 -5 Brown Advisory WMC Strategic European Equity Fund (MUTF: BIAHX ) 680 725 -6.6 -3 T. Rowe Price Emerging Markets Stock ( PRMSX) 649 1940 -9 -20 As we can see, all these top flowing active funds had ended in the red for August and also over the last 1-year period. The reason is not necessarily the inflows, but as we know August has been a cruel month for the broader markets. However, once we compare the performance of active funds that had the biggest outflows, we will see that their loss was much larger. This is in contrast to the trend we noticed for the fund categories in August; where categories with largest outflows suffered relatively less losses. Bottom Flowing Active Funds Net Outflow ($ in million) Performance (%) Aug-15 1 Year Aug-15 1 Year GMO Asset Allocation Bond (MUTF: GABFX ) -2,018 -1,902 -0.6 -11.3 PIMCO Total Return (MUTF: PTTRX ) -2,015 -124,484 -1.1 -4 Templeton Global Bond (MUTF: TPINX ) -1,922 -6,013 -5.4 -14 Franklin Income Fund (MUTF: FKINX ) -1,473 -3,035 -4.4 -14.8 Oppenheimer Developing Markets (MUTF: ODMAX ) -1,059 -1,824 -10.6 -27 Source: Inflow/Outflow data from Morningstar; Performance data calculated using GoogleFinance. For the first time since Bill Gross quit PIMCO to join Janus , the PIMCO Total Return Fund was not at the bottom of funds with the most outflow. It took up the second seat instead. Its 1-year net outflow leads the pack, but the loss is not as much as others. PTTAX has lost 4% over the 1- year period, whereas the others including the Oppenheimer Developing Markets Fund, the Franklin Income Fund, the Templeton Global Bond Fund and the GMO Asset Allocation Bond Fund have suffered larger losses. Coming to Zacks Mutual Fund Ranks, the DoubleLine Total Return Bond Fund, the PIMCO Income Fund and the Templeton Global Bond are the only ones that currently carry a favorable rank. While DBLTX carries a Zacks Mutual Fund Rank #1 (Strong Buy) , the latter two carry Zacks Mutual Fund Rank #2 (Buy). The Strategic Advisers Core Fund and the PIMCO Total Return Fund have a Zacks Mutual Fund Rank #3 (Hold). Meanwhile, the T. Rowe Price Emerging Markets Stock Fund and the GMO Asset Allocation Bond Fund hold a Zacks Mutual Fund Rank #4 (Sell) and the Franklin Income Fund and the Oppenheimer Developing Markets Fund carry Zacks Mutual Fund Rank #5 (Strong Sell). As said, in certain cases there is more arts than science. Fund flows may be just a fraction of a factor to help a fund’s uptrend. Inflows may not translate into gains for mutual funds. Investors do not necessarily have to buy funds that are seeing strong inflows and vice versa. Link to the original post on Zacks.com

Playing With PIIGS: ETFs That Is

There are still pockets of weakness among the PIIGS (Portugal, Ireland, Italy, Greece and Spain),. Not surprisingly, the worst performer of the quintet has been GREK. Over the past two and a half months, yields on the benchmark Italian government bond have fallen about 65 basis points. By Todd Shriber, ETF Professor There are still pockets of weakness among the PIIGS (Portugal, Ireland, Italy, Greece and Spain), the countries previously and some still known as Europe’s problem children, but investors should not outright shun opportunity with the PIIGS. These Little PIIGS Went To Market Entering Tuesday, just two of the five PIIGS’ single-country exchange-traded funds – the iShares MSCI Ireland Capped ETF (NYSEARCA: EIRL ) and the iShares MSCI Italy Capped ETF (NYSEARCA: EWI ) – were higher on a year-to-date basis. Not surprisingly, the worst performer of the quintet has been the Global X FTSE Greece 20 ETF (NYSEARCA: GREK ) , which among other issues, has recently dealt with another market classification demotion and another national election. Although it is down more than 10 percent year-to-date, the iShares MSCI Spain Capped ETF (NYSEARCA: EWP ) is seen as one of the strongest individual PIIGS’ ETFs alongside EIRL, the Ireland ETF. “As for the Spanish ETF, it is valued at around 1.35 times book value, 20 basis points below the global average. The dividend yield of this ETF stands at around 3.8 percent, compared to the global benchmark average of 3.16 percent, according to Morningstar,” reported Barron’s . The European Central Bank’s rendition of quantitative easing, unveiled earlier this year, has reportedly been a boon for commercial real estate deals in Portugal and Spain. Should that trend continue, it could and should benefit EWP, an ETF that allocates nearly 42 percent of its weight to financial services stocks. That is more than two and a half times larger than EWP’s second-largest sector weight. Spanish stocks are also inexpensive. EWP’s P/E ratio is just below 16, implying a discount to the S&P 500 and the EURO STOXX 50 Index. Compelling valuations are one reason why investors have pumped $256.6 million into EWP this year. Over the past two and a half months, yields on the benchmark Italian government bond have fallen about 65 basis points, as some investors have warmed to the notion that lower oil prices and the weak euro will bolster Italian stocks while lifting the eurozone’s third-largest economy out of a recession. EWI, the largest Italy ETF trading in New York, entered Tuesday up 9.2 percent this year. “Gross domestic product is seen expanding 0.9 percent in 2015, up from 0.7 percent projected by the government in April, and then in 2016 more than the 1.3 percent previously forecast,” Bloomberg reported, citing Prime Minister Matteo Renzi. Investors have added $274.1 million to EWI this year. Only GREK has seen larger inflows among the PIIGS single-country ETFs. Another ETF Option For the investor that does not want to make a single-country bet on the PIIGS, the new Deutsche X-trackers MSCI Southern Europe Hedged Equity ETF (NYSEARCA: DBSE ) is an interesting option. DBSE, which debuted last month , is the closest fund on the market today to a true PIIGS ETF. Looking a little closer, DBSE is essentially a combination Spain/Italy ETF, as the countries combine for 95 percent of the fund’s weight; however, that country mix could prove advantageous going forward. Disclaimer: Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Can Apple Drag Struggling Chipmakers Out Of The Mud?

Apple (AAPL) chipmakers were up Wednesday ahead of the iPhone 6S launch Friday, but one analyst cautioned “we are past what coulda, woulda, shoulda been a potential inflection point” for semiconductor stocks. Both the iPhone 6S and 6S Plus have sold out of existing supplies online, ahead of the launch, which pretty much assures lines at retail stores Friday. Still, that demand for the newest iPhones doesn’t mean Apple will drag its struggling chip