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The 60/40 portfolio is off to a good start, as bonds posted gains and global stocks rallied 7.1% in January. As a result, ETFs had $40 billion of inflows, nearly double January’s historical average. Flows were led by the $21 billion into non-US equities (ninth-best ever); US equities had outflows. Meanwhile, bond ETFs added $20 billion of inflows, led by the $7 billion into investment-grade (IG) corporates (third-best ever).
If goldfish have short memories and elephants have long ones, investors need to be part goldfish and part elephant. The goldfish portion helps avoid recency bias and anchoring to the most recent trend or “hot-dot.” It also helps with not fixating on a few days of negative returns. It’s the same concept I relay to my third grade soccer team after the opposing team scores — shake it off and get back in the game (thanks, Ted Lasso).
The elephant side allows investors to stick to their long-term plan by recalling fundamental portfolio construction beliefs. This ranges from rebalancing programs that prevent kneejerk market timing reactions to strategic asset allocation frameworks that let diversification do the heavy lifting during times of market stress.
Balancing goldfish and elephant cognitive thought processes is the trick. Too much goldfish, and investors miss red flags or are unaware that a new trend could have staying power. Goldfish-only investors likely missed how consistent aggressive rate hikes impacted both stocks and bonds last year — and didn’t move fast enough to alter their allocations. Too much elephant, and investors don’t budge off their first principles and become inflexible. For example, they mistakenly believe that they can always rely on a Federal Reserve (Fed) Put.
But investors have kicked off 2023 as goldfish, forgetting the poor returns across asset classes in 2022 and the Fed’s resolve to keep hiking rates to tame inflation. As a result, January inflows were well above their average.
Investors Head Overseas
As a result of seasonal effects largely stemming from tax-motivated behavior in equity exposures, January is typically a subdued month for flows. In fact, the 10-year average for January inflows is just $23 billion, the lowest total of any month.
Driven by gains in both stocks and bonds following a dour 2022, where both asset classes fell double digits, January flows got off to a better-than-average start — taking in $40 billion, almost double the monthly average, as shown below.
The above average flows were driven by heighted interest in non-US equities, and for good reason. Relative to US equities, non-US stocks are on their best three-month run since the Global Financial Crisis. In fact, their 13% outperformance over the past three months ranks in the 99th percentile over 20 years.1
A weakening US dollar, fewer downside earnings revisions, China’s re-opening, and more attractive valuations are driving this performance trend. This is investors activating their elephant synapses to recall how liquidity, attractive fundamentals, and macro tailwinds support performance.
Accordingly, international regional ETFs had $5 billion of inflows in January, their most all-time for a month. Regional funds led the non-US equity category with $21 billion of inflows, their ninth-best month ever.
Single-country funds (led by China’s $2 billion of inflows, the fourth-best month ever as investors are finally waking up to a potential rebound) had their fifth-best month ever (+$4 billion). And emerging market (EM) funds added another $5 billion, ranking in the historical 97th percentile.
All this occurred as US-focused exposures posted outflows for the first time since April 2022. As a result, the short-term trend has begun to favor non-US exposures, as shown below. On a trailing three-month basis, non-US is now outpacing the US for the first time since 2019 in a material way. But despite the strong recent trend, flows over the past year for non-US exposures remain almost $200 billion below that of US equities — indicating the non-US trade is not yet crowded.
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Footnotes
1 Bloomberg Finance, L.P. as of January 31, 2023 based on the performance of the S&P 500 Index and the MSCI World ex-US Index.
2 Bloomberg Finance, L.P as of January 31, 2023 based on the US Dollar Spot Rate.
3 FactSet as of January 31, 2023.
4 FactSet as of January 31, 2023.
5 FactSet as of January 31, 2023.
Glossary
Bloomberg Commodity Index (BCOM)
Calculated on an excess return basis and reflects commodity futures price movements.
Bloomberg US Aggregate Index
Flagship measure of US investment grade debt from a multitude local currency markets. This benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds.
MSCI ACWI Index
Market-capitalization-weighted stock market index that measures the stock performance of the companies in developed and emerging markets.
MSCI World Ex-US Index
Market-capitalization-weighted stock market index that measures the stock performance of the companies in developed markets – excludng the US.
S&P 500® Index
Market-capitalization-weighted stock market index that measures the stock performance of the 500 largest publicly traded companies in the United States.
Smart Beta
Term for rules-based investment strategies that don’t use conventional market-cap weightings.
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Originally Posted February 6, 2023 – Investors Put 2022 in the Rearview and Double January’s Average ETF Inflow
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