Yield of Dreams

Record Month for Fund Inflows, But Don’t Get Out the Champagne Yet

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Morningstar just announced that January was a record month for mutual fund flows, with investors pouring $86 billion into long-term funds overall. After five years of outflows from domestic equity funds, January was marked by $15 billion in inflows to these funds, the largest since 2004. The news has many celebrating the big turnaround in investor sentiment. Even American Funds, the fund giant whose star has dimmed the last couple years, saw its first monthly inflow since June 2009.

But don’t bust out the champagne just yet, Morningstar says:

One month of good flows does not, however, constitute proof of a major change in investor preferences. In organic growth rate terms, U.S. stock open-end funds experienced slower growth than any other major asset class in January. In addition, stronger flows are to be expected in January because of seasonal factors such as lump-sum contributions to retirement accounts at the start of each year. The past three years saw relatively strong flows at the start of the year only to be offset by outflows later in the year.

Another factor contributing to the recent strong flows was the acceleration of dividend payments into 2012 by firms hoping to avoid potential tax law changes ahead of the fiscal cliff. According to the Bureau of Economic Analysis, “Personal dividend income was boosted by $291.0 billion (at an annual rate) in December and by $25.8 billion (at an annual rate) in November, which reflected accelerated and special dividend payments in anticipation of changes in individual income tax rates.” Much of this increase went into savings as the personal savings rate spiked in December. These sorts of one-off factors should not be expected to persist.

Are the flows simply a matter of one-off factors?

I tend to agree with Morningstar. After all, a new Casey Quirk study out today says investment managers will grow less than 1 percent from net new money per year through 2017.

“Ownership will play a significant role in determining winners and losers,’’ said Ben Phillips, partner at Casey Quirk, in a press release. “Money management bank subsidiaries, firms that are part of multi-affiliate asset management holding companies, and first-generation partnerships are just some examples of companies that will need to grapple with the significant challenges faced in a slow-growth environment.”

Some good news (for the retail brokerage industry) is that individuals, not institutions, will drive future growth. Casey Quirk expects that four-fifths of $40 billion in net new revenue to come from the increasing wealth of individuals over the next five years.

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What's Yield of Dreams?

Casting a gimlet-eye on asset management issues.

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