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Lipper U.S. Fund Flows: Investors Pad The Coffers Of Money Market Funds Ahead Of Jobs Report

During the fund-flows week ended December 2, 2015, investors remained on the fence ahead of the U.S. nonfarm payrolls report, the European Central Bank’s details of its stimulus plans, and after learning that Chinese regulators were investigating two Chinese brokerage firms for securities violations. And, of course, investors were anxiously awaiting results of Black Friday and Cyber Monday sales to get a gauge of consumer demand for the upcoming holiday season. With the U.S. market closed for Thursday’s Thanksgiving Day holiday, returns were muted on Friday; investors preferred the comfort of defensive issues after energy shares once again took it on the chin following another decline in oil prices that were pressured by a strong dollar and concerns of a glut in global supply. While energy shares saw a slight boost on Monday after an uptick in oil prices, retail stocks struggled as first reads on the beginning of the holiday shopping season appeared soft. A weaker-than-expected Chicago PMI report indicated the region fell back into contraction territory, but that was partially offset by a 0.2% increase in pending home sales for October. Investors even appeared to shrug off a subpar reading of the November ISM manufacturing index, which fell to 48.9 (the lowest reading since 2009 and signaling contraction), ahead of comments from Federal Reserve Chair Janet Yellen and the nonfarm payrolls report due on Friday. Better-than-expected reports on construction spending and auto sales helped keep investors engaged. On Wednesday, however, stocks turned down as Yellen and Atlanta Fed President Dennis Lockhart both indicated a case for an imminent rate increase and as oil futures sank under $40 a barrel. Nonetheless, investors were net purchases of fund assets (including those of conventional funds and exchange-traded funds [ETFs]), injecting a net $15.2 billion for the fund-flows week ended December 2. Cautious investors turned their back on equity and fixed income funds, redeeming $0.9 billion and $2.1 billion net, respectively, for the week, but they padded the coffers of money market funds (+$17.8 billion) and municipal bond funds (+$0.4 billion) on the uncertain news. For the eighth week in a row equity ETFs witnessed net inflows, taking in $3.8 billion for the week. Despite initial concerns over the holiday season, authorized participants (APs) were net purchasers of domestic equity ETFs (+$3.4 billion), injecting money into the group for a third consecutive week. They also padded—for the second week running—the coffers of nondomestic equity ETFs (but only to the tune of +$0.4 billion). As a result of the relative risk aversion during the week, APs turned their attention to higher-quality, well-known equity offerings, with the SPDR S&P 500 ETF (NYSEARCA: SPY ) (+$2.7 billion), the iShares MSCI Eurozone ETF (NYSEARCA: EZU ) (+$0.3 billion), and the SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ) (+$0.2 billion) attracting the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum the SPDR Gold ETF (NYSEARCA: GLD ) (-$566 million) experienced the largest net redemptions, while the iShares Nasdaq Biotech ETF (NASDAQ: IBB ) (-$267 million) suffered the second largest redemptions for the week. 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 $4.7 billion from the group. Domestic equity funds, handing back $3.4 billion, witnessed their fourth consecutive week of net outflows. Meanwhile, their nondomestic equity fund counterparts witnessed $1.3 billion of net outflows—suffering net redemptions for the third consecutive week. On the domestic side investors lightened up on large-cap funds and equity income funds, redeeming a net $1.7 billion and $0.7 billion, respectively, for the week. On the nondomestic side international equity funds witnessed $1.3 billion of net outflows, while emerging-market equity funds handed back some $0.7 billion. For the fourth consecutive week taxable bond funds (ex-ETFs) witnessed net outflows, handing back a little more than $1.8 billion for the week. Corporate investment-grade debt funds suffered the largest redemptions for the week, witnessing net outflows of $737 million (for their second consecutive week of net redemptions), while flexible portfolio funds witnessed the second largest net redemptions (-$654 million). Despite the increasing chance of a December interest rate increase, bank rate funds—handing back some $367 million for the week—experienced their nineteenth consecutive week of net outflows. For the ninth week in a row municipal bond funds (ex-ETFs) witnessed net inflows, taking in $331 million this past week.

4 Key Reasons To Consider Market Neutral Investing

Summary The Invesco Quantitative Strategies team believes one way to buffer the effects of market downturns, volatility and rising interest rates is to add market neutral equity strategies to traditional portfolios. The strategies may offer several potential benefits to investor portfolios, including diversification from traditional asset classes, ability to dampen volatility, cushion against equity market declines and boost from rising rates. We believe a market neutral equity strategy can be an excellent diversification tool that enables investors to pursue increased returns from assets that respond differently to changing markets. Low correlation, downside protection and rising rate performance among key benefits By Kenneth Masse, Client Portfolio Manager The market downturn and ensuing volatility in the third quarter of 2015 is a timely reminder about the benefits of diversifying your portfolio with investment strategies that are expected to exhibit little-to-no correlation with the broad equity and bond markets. Moreover, as the US enters the late innings of its current economic growth cycle, many professional and individual investors are expecting lower returns from equities going forward than they’ve enjoyed over the last few years. These lowered expectations are on top of concern about what will happen to investors’ bond holdings when today’s historically low interest rates eventually rise. The Invesco Quantitative Strategies team believes one potential way to buffer the effects of market downturns, volatility and rising interest rates is to add market neutral equity strategies to traditional portfolios, as they potentially offer a unique approach to generating return regardless of the general movements of the equity and bond markets. In this blog, I outline four of the top reasons to consider market neutral equity strategies: 1. They have very low levels of correlation to other asset classes One of the ways investors attempt to manage and mitigate risk is by combining strategies that differ within and across asset classes to help diversify their return pattern over time. Using this approach, investors’ wealth creation is not tied to the fortunes of just one or a few investment options. Since market neutral strategies typically seek to eliminate exposure to the broader market, these strategies have also delivered attractively low levels of correlation, not only to the equity markets, but to other broad asset classes as well. As shown in Figure 1, from January 1997 to August 2015, market neutral strategies had only a 0.18 correlation to equities and a 0.04 correlation to bonds. Market neutral also had low correlation to another popular asset class, commodities, as well as to other segments of the fixed income market, such as leveraged loans and high yield. As investors seek to diversify their holdings in order to lower overall volatility, we believe market neutral strategies should be considered as a way to achieve that goal. Sources: Invesco and StyleADVISOR. (January 1997 – August 2015) BarclayHedge Alternative Investment Database. Past performance is not a guarantee of future results. Investments cannot be made directly into an index. 2. They may offer lower levels of total volatility Another way to potentially mitigate risk across an investment lineup is to include strategies that may offer lower levels of total volatility (variation in portfolio returns). Even if these strategies were perfectly correlated with other investments, their potentially lower total volatility profile could help lower the overall average volatility of the full lineup. Market neutral strategies also may be appealing to investors from this total volatility perspective, as their volatility has tended to be less than the broader equity markets, and in some cases, similar to broad fixed income indexes (see Figure 2). Furthermore, since market neutral returns are expected to be independent of the broader equity market, a spike in market-level volatility may not necessarily mean a spike in market neutral volatility. Sources: Invesco and StyleADVISOR. (January 1997 – August 2015). BarclayHedge Alternative Investment Database. Past performance is not a guarantee of future results. Investments cannot be made directly into an index. 3. They have a history of attractive downside protection during extreme market stress Another often-cited potential benefit of market neutral is that the strategies may offer investors a way to mitigate severe losses during a sharp equity market sell-off. Because these strategies typically have beta exposure to the market that hovers around zero, a big drop (or surge) in equities should not influence the performance of the strategy. This contrasts sharply with traditional, benchmark-centric strategies, which typically have very high levels of market exposure and tend to vary similarly to the broader market. Sources: Invesco and StyleADVISOR. January 1997 – August 2015. BarclayHedge Alternative Investment Database. Past performance is not a guarantee of future results. Investments cannot be made directly into an index. 4. They can provide an opportunity for higher returns in a rising interest rate environment. We believe an increase in the federal funds rate from the US Federal Reserve is inevitable; at this point it’s simply a matter of when and by how much. For market neutral equity strategies, a rise in interest rates – specifically short-term interest rates – can potentially provide a boost to returns. This occurs when market neutral equity strategies short a stock and receive proceeds from that sale. Those proceeds typically earn a rate of return tied to the prevailing short-term interest rate, such as the fed funds rate. When that rate increases, so does the interest earned by market neutral equity strategies on their short sale proceeds Key takeaway We believe a market neutral equity strategy is a valuable complement to a traditional portfolio of stocks and bonds, as well as an excellent diversification tool that enables investors to pursue increased returns from assets that respond differently to changing market conditions. Such characteristics may be important to today’s investors given the recent market downturn, volatility and expectation of rising interest rates. Important information Beta is a measure of risk representing how a security is expected to respond to general market movements. Correlation is the degree to which two investments have historically moved in relation to each other. Volatility measures the amount of fluctuation in the price of a security or portfolio over time. The S&P 500® Index is an unmanaged index considered representative of the US stock market. The S&P/LSTA US Leveraged Loan 100 Index is representative of the performance of the largest facilities in the leveraged loan market. The S&P GSCI Index is an unmanaged world production-weighted index composed of the principal physical commodities that are the subject of active, liquid futures markets. The BofA Merrill Lynch US High Yield Index tracks the performance of US dollar-denominated, below-investment-grade corporate debt publicly issued in the US domestic market. BarclayHedge Alternative Investment Database is a computerized database that tracks and analyzes the performance of approximately 6800 hedge fund and managed futures investment programs worldwide. BarclayHedge has created and regularly updates 18 proprietary hedge fund indices and 10 managed futures indices. BarclayHedge indexes reflect performance of hedge funds, not of retail investment strategies, and are used for illustrative purposes only solely as points of reference in evaluating alternative investment strategies. Please note: BarclayHedge is not affiliated with Barclays Bank or any of its affiliated entities. Performance for funds included in the BarclayHedge indices is reported underlying fees in net of fees. About risk Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments. Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating. Most senior loans are made to corporations with below investment-grade credit ratings and are subject to significant credit, valuation and liquidity risk. The value of the collateral securing a loan may not be sufficient to cover the amount owed, may be found invalid or may be used to pay other outstanding obligations of the borrower under applicable law. There is also the risk that the collateral may be difficult to liquidate, or that a majority of the collateral may be illiquid. Junk bonds involve a greater risk of default or price changes due to changes in the issuer’s credit quality. The values of junk bonds fluctuate more than those of high quality bonds and can decline significantly over short time periods. Derivatives may be more volatile and less liquid than traditional investments and are subject to market, interest rate, credit, leverage, counterparty and management risks. An investment in a derivative could lose more than the cash amount invested. Short sales may cause the fund to repurchase a security at a higher price, causing a loss. As there is no limit on how much the price of the security can increase, the fund’s exposure is unlimited. The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE All data provided by Invesco unless otherwise noted. Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC (Invesco PowerShares). Each entity is an indirect, wholly owned subsidiary of Invesco Ltd. ©2015 Invesco Ltd. All rights reserved. Four key reasons to consider market neutral investing by Invesco Blog

Equity CEFs: Buy What’s Working At A Discount

Summary The market cannot be any more clear. If you want to make money in this market, buy what has been working and ignore everything else. Indeed, every rotation head fake that seemed to finally benefit the “have not” sectors has only been an opportunity to sell and add more to the “have” sectors. Perhaps we’ll see another rotation at the beginning of 2016 but if history is any guide, the last few years has shown that trying to play a rotation is futile. Has anyone seen such a vast difference in sector performance than what we are seeing today? Just a month ago, I wrote this article, The Chasm Between What Works And What Doesn’t , and since that time not only has it gotten worse, its gotten a lot worse. In fact, it’s gotten to a point where if you want to play CEFs, which generally have not kept up with their ETF benchmarks, at least at the market price level, you have to play what’s working. And what’s working are funds which invest primarily in the large-cap technology sector. Yes, healthcare, banking and a few other sectors also are working but if you really want to follow what every institution is throwing all their weight behind here at year-end 2015, it’s large cap information technology. And what CEFs are best positioned for that? Well, let’s go to the scoreboard and see which equity CEFs have had the best YTD NAV total return performance. The following 35 funds represent the best NAV performances compared to the S&P 500 (which I use as a general benchmark for all equity CEFs). Funds in green in the YTD NAV Tot Ret column have seen their NAVs outperform the S&P 500, as represented by the SPDR S&P 500 Trust (NYSEARCA: SPY ), which is up 3.4% YTD through December 4th, 2015, including dividends. NOTE: The S&P 500 is generally quoted without dividends and is up 1.6%. (click to enlarge) Buying What’s Working At A Discount No other fund family has more equity CEFs working than from Eaton Vance , though I think you have to be selective at this point. My No. 1 pick is the Eaton Vance Enhanced Equity Income II fund (NYSE: EOS ) , $13.60 market price, $14.75 NAV, -7.8% discount, 7.8% current market yield . EOS has been a favorite of mine since 2011 and I have always maintained a position in it though I have added and reduced over the years depending on its valuation. And if you want to go on its current valuation, EOS is a buy again. This is reflected in EOS’ YTD Premium/Discount chart in which EOS has moved back down to almost an -8% discount, its widest all year and even wider than when I first wrote about EOS all the way back in February of 2011, EOS: A Compelling Valuation After A 2-Year Wait . (click to enlarge) Back in early 2011, EOS was trading at a -6.8% discount, which seemed wide at the time considering EOS often traded at a premium of 5% to 10% since its inception in early 2005. But a series of distribution cuts for all of the Eaton Vance option income CEFs beginning in 2010 and continuing through 2011 dropped their valuations to double-digit discounts of up to -16% in the fall of 2011 despite their NAVs beginning to show a turnaround. I wrote many articles during this time frame arguing that the distribution cuts were necessarily and would ultimately benefit the funds in the long run. So despite most investors giving up on the Eaton Vance option-income funds during this time and driving them down to valuations not seen since 2009, anyone who took my advice and bought these funds during this period has enjoyed one of the great runs of any family of CEFs. Today, the Eaton Vance option-income CEFs are probably the most popular equity CEFs to get exposure in the large cap information technology sector since virtually all of them own Apple (NASDAQ: AAPL ) , Alphabet/Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ) , Facebook (NASDAQ: FB ) , Amazon (NASDAQ: AMZN ) and other strong performers in their top 10 holdings. In fact, they have become so popular that a couple, like the Eaton Vance Tax-Managed Buy/Write Opportunities fund (NYSE: ETV ) and the Eaton Vance Tax-Advantaged Buy/Write Income fund (NYSE: ETB ), now trade at the high end of their valuations with ETV at a 3.1% market price premium while ETB trades at a 5.4% market price premium. ETB, in particular, has gotten significantly ahead of itself based on its NAV performance and I would be swapping out of ETB and into EOS or really any other Eaton Vance option-income CEF at this point. ETB got a bump after a positive Barron’s article two weekends ago in which a money manager brought up its long-term outperformance over the S&P 500. That’s true, and I had been pointing out ETB’s outperformance at the NAV level for years, but ETB and indeed, ETV, are very defensive option-income CEFs and just because their NAVs have outperformed since inception, i.e. throwing in the 2008 financial crisis, does not mean that they are the best funds to own in a strong information technology stock-driven market. This is shown in the following table in which I re-sorted all of the equity CEFs by their NAV total return performance since 2012 when the ramp up Nasdaq-100 stock boom really got started. (click to enlarge) And if I just include the Eaton Vance option-income CEFs from the above table, this is how they have performed since 2012. (click to enlarge) As you can see, the lower the option % under Income Strategy , the more upside capture the fund generally offers. So in a continued up market, particularly if information technology continues to lead, you’re going to want to own EOS first over any of these funds. And at a -7.8% discount compared to ETB’s 5.4% premium despite both funds having similar 7.7% market yields, it’s not even a question. In fact, at a 7.1% NAV yield, EOS will probably be the first Eaton Vance option-income CEF to be in a position to raise its distribution if this technology rally continues. On the other hand, if you believe the markets are topping out and you want to consider a more defensive option-income CEF, I would swap out of ETB again at a premium and go into ETJ at an -11.7% discount and a much higher 11.0% current market yield. ETJ is the most defensive of all the Eaton Vance option-income funds due to its 95% put option collar in addition to writing 95% call options on its US-based stock portfolio. That uber defensive option positioning is why ETJ has the lowest total return of the group since 2012, both in NAV and market price but it also means ETJ will hold up dramatically better at the NAV level should the markets and primarily the S&P 500 weaken. But what I find surprising so far in 2015 is that despite ETJ’s extremely defensive risk-adjusted strategy, its NAV performance has significantly improved over years past and not only is it beating the S&P 500 by being up 3.5% YTD, it’s not that far behind ETB’s total return NAV performance of 4.6% YTD. I hadn’t always endorsed ETJ because historically its added put collar expense had been a major drag on performance. But obviously, Eaton Vance has found a way for the fund to load up on outperforming stocks while keeping its S&P 500 index option writing and put collar strategy in place at a reasonable expense. The bottom line is that the Eaton Vance option-income CEFs are a great way to get exposure to the large-cap information technology sector at a discount. All you have to do is choose which defensive option strategy suits your needs. Conclusion The Eaton Vance option-income CEFs certainly represent what is working in this market though you have to be selective during this period. Year end is one of the volatile times for equity CEFs as many investors use these funds for tax-loss selling and institutions often make big changes either due to forced selling/buying (hedge fund redemptions) or for re-balancing. Just last week, one of the other popular Eaton Vance option funds, the Eaton Vance Tax-Managed Global Buy/Write Opportunities fund (NYSE: ETW ) , $11.33 market price, $11.92 NAV, -5.0% discount, 10.3% current market yield , dropped on huge volume from some institutional investor who was probably just liquidating after seeing such a large run in the fund since 2012. ETW, which I also had reduced significantly before last week, had risen to almost a par valuation just two weeks ago, something the fund hasn’t seen for years. Here is ETW’s five-year Premium/Discount chart. (click to enlarge) This is what is going on in this market for the “what’s working” stocks and funds, though how long this can last while the “have not” crowd continues to plummet is the question. Though I never thought I would recommend investors swap out of a “what’s working” fund like ETB, I don’t get married to any CEF forever either. Just so you know, I wrote more positive pieces on ETB than any other CEF during 2011 and 2012. So how long can this go on for? Well, if you use 1999 as a template in which the Nasdaq rose something like 86% in the span of six months from September of 1999 to March of 2000 while the breadth of the overall market continued to narrow, I guess we have a little ways longer to go. Of course, back in 1999 the Nasdaq traded in fractions of 1/2 point, 3/4 point up to 1 point or even 2 point spreads. That means most technology stocks on the Nasdaq traded with $0.50 to up to $2 spreads between bid and ask. Today, the Nasdaq uses decimals in which spreads, even for the high flying Nasdaq stocks, are often quoted in just pennies. You don’t have to be a genius to figure out that its a lot easier to move stocks up or down with very wide spreads than very narrow spreads so even though it has taken a few years this go around to move the Nasdaq back up to all time highs, thanks to Quantitative Easing and buybacks, I think the end result will be the same, particularly in a rising interest rate environment. As such, I think the Nasdaq peaks sometime before February of next year.