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Lipper U.S. Weekly Fund Flows: A Tale Of 2 Cities

By Tom Roseen During the fund-flows week ended January 27, 2016, markets continued their wild swings upon hearing conflicting market and economic news throughout the week. On Thursday, January 21, U.S. stocks got a shot in the arm, fueled by a rally in oil prices, despite news that crude inventories had risen the prior week, that weekly initial jobless claims had risen to their highest level since July, and that the Philadelphia Federal Reserve Bank’s manufacturing index remained in negative territory for the fifth month in a row. Hints of more stimuli by the European Central Bank and news that China’s central bank had injected more cash into the country’s financial system helped markets gain some footing. On Friday all three major U.S. indices posted their first week of plus-side returns for 2016 after oil prices rose to their highest levels in nearly two weeks and after a report showed that North American oil rigs’ output had declined slightly. Market participants cheered news that preliminary readings of the purchasing managers’ index were on the rise and that December existing-home sales rose a whopping 14.7%. Unfortunately, another major rout in oil prices weighed heavily on the markets on the following Monday, sending the Dow Jones Industrial Average down by triple digits as investors began to look for clues on the Fed’s outlook after the FOMC meeting adjourned on Wednesday. Nonetheless, U.S. markets rose once again after witnessing another rebound in oil prices and after learning about strong earnings reports from bellwether firms Sprint (NYSE: S ), P&G (NYSE: PG ), and 3M (NYSE: MMM ). The U.S. market shrugged off another round of large declines in China’s Shanghai Composite and cheered news that November U.S. home prices rose at their fastest pace in 16 months and that January’s consumer confidence index beat expectations. Despite the Fed leaving rates unchanged after its January FOMC meeting, some investors worried that it had left the door open for a March interest rate increase, even though it acknowledged that economic growth had slowed. That led the U.S. markets to suffer yet another round of declines on Wednesday. A rise in oil and news that new home sales had rebounded in December weren’t enough to push the markets higher. While investors were net purchasers of fund assets (including those of conventional funds and exchange-traded funds [ETFs]), injecting a net $16.6 billion for the fund-flows week ended January 27, the headline numbers were a little misleading. As might be expected, given the recent volatility, investors turned their backs on equity funds, redeeming $1.2 billion net for the week, but they padded the coffers of money market funds (+$13.9 billion), taxable bond funds (+$3.3 billion), and municipal bond funds (+$0.6 billion). For the first week in four equity ETFs witnessed net inflows, taking in $3.9 billion. Despite concerns over the FOMC announcement, authorized participants (APs) were net purchasers of domestic equity ETFs (+$3.8 billion), injecting money into that group also for the first week in four. They also padded-for the first week in three-the coffers of nondomestic equity ETFs (but only to the tune of +$107 million). Perhaps as a result of the strengthening oil prices and better-than-expected earnings news from stalwart U.S. firms, APs turned their attention to some big-name ETFs, with the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) (+$3.5 billion), the iShares Russell 2000 ETF (NYSEARCA: IWM ) (+$2.7 billion), and the iShares MSCI Japan ETF (NYSEARCA: EWJ ) (+$0.7 billion) attracting the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum the iShares Russell 1000 Growth ETF (NYSEARCA: IWF ) (-$0.7 billion) experienced the largest net redemptions, while the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) (-$0.5 billion) suffered the second largest redemptions for the week. For the seventh week in a row APs padded the coffers of government/Treasury funds, injecting $3.7 billion for the week, their largest net inflows since February 4, 2015. Once again, in contrast to equity ETF investors, for the fourth week in a row conventional fund (ex-ETF) investors were net redeemers of equity funds, redeeming $5.1 billion from the group. Domestic equity funds, handing back $4.9 billion, witnessed their twelfth consecutive week of net outflows, despite posting a weekly return of 1.35%. Meanwhile, their nondomestic equity fund counterparts witnessed $0.2 billion of net outflows-suffering net redemptions for the first week in three. On the domestic side investors lightened up on large-cap funds and equity income funds, redeeming a net $2.3 billion and $1.0 billion, respectively, for the week. On the nondomestic side global equity funds witnessed $1.2 billion of net outflows, while international equity funds attracted some $1.0 billion. For the twelfth consecutive week taxable bond funds (ex-ETFs) witnessed net outflows, handing back a little over $2.6 billion for the week. Corporate investment-grade debt funds suffered the largest redemptions for the week, witnessing net outflows of $2.1 billion (for their tenth consecutive week of net redemptions), while corporate high-yield funds witnessed the second largest net redemptions (-$0.7 million). Despite the Fed’s leaving the door open for a March rate hike, bank rate funds-handing back some $0.7 billion for the week-experienced their twenty-seventh consecutive week of net outflows. In a flight to safety investors injected net new money into government mortgage funds (+$0.6 billion), government/Treasury and mortgage funds (+$0.4 billion), and government/Treasury funds (+$0.1 billion) for the week. For the seventeenth week in a row municipal bond funds (ex-ETFs) witnessed net inflows, taking in $502 million this past week.

There’s The Time Value Of Money – And There’s The Value Of Your Time

An underappreciated benefit of low-cost, index-based investing is the modest time involved. That is, in comparison to the time commitment associated with individual stock-picking or some other variant of active investment management. The low-cost, index-based approach gives an investor more time to enjoy other pursuits. Such as time with family and friends, a good book, music, charitable and civic activities, hobbies (what’s a hobby?)… and on occasion a nice glass of wine. Active investment management in contrast goes hand-in-hand with consistent if not constant dedication to general economic news, industry-specific business news, and company-specific news. Attention to all the topics, risks, and developments described in detail in Securities and Exchange Commission filings or other disclosure documents that few investors read in time-consuming detail. Attention that’s paid by oneself or by compensating another to pay that attention. (It’s commonly forgotten that the word “pay” in the phrase “pay attention” is literal. One pays with one’s time, a precious, perishable, and irretrievable item. A costly item.) “Found time” via indexing has value of course. Value that may be hard to quantify, but quantification matters little. Please remember this: the average human life span is less than one million hours. Concern yourself not with Chinese export trends and currency manipulation, Midwest factory capacity utilization, Janet Yellen’s disposition, Vladmir Putin’s territorial ambitions of the month, Apple’s iPhone sales during the most recently concluded quarter, the price of oil, or the like. Or whether that company of which you hold many shares of stock will successfully bid that contract, win that lawsuit, or get that drug approved. Instead, relax. Yes, index-based investing consumes time – just not much. For example, a little time is involved in prudent rebalancing. That’s time well spent. As is time taking advantage of opportunities to reduce one’s investment costs, as cost pressures on investment managers of all stripes continue to lower costs. And with “robo-advisors” and their increasingly sophisticated auto-pilot portfolios sprouting like weeds these days, the time commitment to be a responsible low-cost, index-based investor decreases even more. Unless an investor consumes the greater part of daily economic news for enjoyment or as a hobby – and seems that’s a tall order with today’s information proliferation – what’s not to like about time saved? Especially when coupled with low-cost, index-based investing that can be expected, as empirical studies time and again show, to yield higher risk-adjusted net returns.

Marotta’s 2016 Gone-Fishing Portfolio

In 2011, we made the Marotta Gone Fishing Portfolio and have updated and reviewed it every year since. A gone-fishing portfolio has a limited number of investments with a balanced asset allocation that should do well with dampened volatility. Its primary appeal is simplicity. But a secondary virtue is that it avoids the worst mistakes of the financial services industry. The Marotta gone-fishing portfolio is used by many subscribers as a free and simple way of low-cost investing. The gone-fishing portfolio provides suggested asset allocations for investors up to age 70 and up to $1 million. Comprehensive financial planning can always inform your asset allocation, but when you are older than age 70 or investing more than $1 million, factors like cash flow analysis, tax planning, and other wealth management services are critical to developing the optimum asset allocation . The services of a competent fee-only fiduciary can help you with these issues. Each year, we review the return of last year’s suggested portfolio for a 40-year-old and offer our changes for this year. The Age 40 Marotta Gone Fishing Portfolio is 85.4% stocks, to provide appreciation, and 14.6% bonds, to provide stability for withdrawal needs. We would not expect a portfolio of 14.6% bonds to outperform the S&P 500, but this portfolio has held up well. The returns of the past three years has finally allowed the S&P 500 to catch up to and surpass the gone fishing portfolio’s annual return. The S&P 500′s annual return for the past ten years is now 7.31%. Last year’s portfolio is impressively similar with an annual return for the past ten years of 7.01% annually. That being said, last year’s returns were disappointing. The 2015 gone fishing portfolio was down -6.88% compared to the S&P 500′s return of 1.38%. Last year, we made one change. We dropped Vanguard Information Technology ETF (NYSEARCA: VGT ) and replaced it with Vanguard Mid-Cap Value ETF (NYSEARCA: VOE ). We made this change to create a style box asset allocation which is very close to our ideal for U.S. stocks . Both funds are good funds, but it would have produced a better return to stick with VGT. In 2015, VGT had a return of 5.01% versus VOE’s return of -1.80%. Choosing VOE last year was unfortunate but not a mistake. We had good reasons to make this change looking forward, but looking backward it would have been better to make this change at a different time. This year, we have made three changes to the Gone Fishing Portfolio recommendation. If you were already invested according to last year’s asset allocation, you can change these positions with a simple buy and sell. The first change is to move from PIMCO Emerging Markets Bond Institutional (MUTF: PEBIX ) to Vanguard Emerging Markets Government Bond ETF (NASDAQ: VWOB ). VWOB seeks to follow the Barclays USD Emerging Markets Government RIC Capped Index which includes dollar-denominated bonds issued by emerging market governments, government agencies, and government owned corporations. PEBIX is comprised of unhedged foreign bonds, meaning that the payments and return of principle are in foreign currencies. Having some of your purchasing power in currencies other than the US dollar can provide some diversification. On the other hand, a hedged foreign bond fund protects payments against the possibility of the U.S. dollar strengthening. This is sometimes done by selling the value if the U.S. dollar weakens beyond a certain point and purchasing the value if the US dollar strengthens beyond a certain point. The nuances of hedging foreign bonds or getting paid back in US dollars are quite complex, but we decided that for a gone fishing portfolio even if unhedged foreign bonds made more money the added volatility was not worth it. VWOB should provide many of the benefits of foreign bonds without the added volatility of currency fluctuations. The past few years the strengthening dollar has hurt the returns of unhedged foreign bonds. In 2015, PEBIX had a total return of -2.78% versus the 1.65% return of VWOB. In 2014, PEBIX had a total return of 1.03% versus the 4.21% return of VWOB. While we don’t know if the U.S. dollar will strengthen or weaken in the future, investing in VWOB means we won’t have to worry about it. And as another added benefit, VWOB has an expense ratio of 0.34% instead of PEBIX’s expense ratio of 0.83%, the highest in our gone fishing portfolio from last year. At a minimum, we expect to make an extra 0.49% on account of the lower expense ratio. The other two changes are replacing iShares MSCI Canada ETF (NYSEARCA: EWC ) and iShares MSCI Australia ETF (NYSEARCA: EWA ) with SPDR MSCI Canada Quality Mix ETF (NYSEARCA: QCAN ) and SPDR MSCI Australia Quality Mix ETF (NYSEARCA: QAUS ). QCAN and QAUS are relatively new funds having been started in 2014. Each has an expense ratio of 0.30% replacing the 0.45% expense ratio of EWC and EWA. We only have one year of 2015 to judge these funds against the funds we are replacing, but the lower expense ratio alone is reason enough to switch. In 2015, QCAN had a total return of -20.86% versus the -23.91% return of EWC, and QAUS had a return of -9.30% versus the -9.96% return of EWA. While neither did well last year, losing less money is always a better investment return. We also made one change to the age-specific asset allocation recommendations. We removed any allocations to stability for those 27 and under. These ages had a bond allocation that was less than 2%, but young people who are saving and investing don’t need a bond allocation. If they want to keep some money set aside as an emergency fund, that amount is dependent on their lifestyle spending, not the value of their saved assets. As a result, we don’t begin recommending any bonds until a 2.1% bond recommendation at age 28. While we count on long-term market appreciation, the best way to achieve your financial goals is to moderating your spending and stay on track with your savings. The markets are both profitable and volatile, but your financial future is mostly dependent upon actions that are in your control.