US equity funds face “correction risk”

Wall streetLarge-cap US equities continue to rise in value yet flows into funds are in reverse – a situation described as a “decoupling” by Bank of America Merrill Lynch (BofAML).

The asset class has seen outflows in nine of the past 10 weeks, with year-to-date outflows standing at around $79 billion (€72.6 billion).

BofAML says correction risks will grow without fresh inflows in coming weeks.

European and Japanese equities, and credit, have gained more inflows this year, while US and emerging market equities, money-markets and bank loans
have all struggled over the period.

The latest weekly fund flows showed bond funds outperforming equities, with inflows of $5.6 billion in contrast to equity outflows of $6 billion – $4.9 billion of which came out of exchange traded funds (ETFs).

The figures extend the year-to-date trend, which has seen $121 billion of bond inflows versus only $1 billion of equity inflows.

US monthly product trends research from Cerulli Associates also highlights weakness in ETF flows, which were outpaced by mutual funds for a third straight month in March. Mutual fund assets ended the month at $12.3 trillion, while ETF assets ended March approaching $2.1 trillion.

The Cerulli report also finds that, as investors prepare their portfolios for an anticipated Federal Reserve interest rate hike, they are allocating to, and considering investing in, non-traditional fixed-income strategies that aim to improve risk-adjusted returns.

A survey of product executives by Cerulli reveals that a need for income is a significant driver in portfolio construction decisions. Nearly 80% of the retail channel, 26% of the institutional channel, and also 90% of financial advisors reported that the demand for income is highly or somewhat influential in their investment choices.

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