Investor Flows – The Risk-On Trade That Refuses to Die

Large cap equities were back in vogue last week, driven by primarily higher beta sectors including energy, financials, materials, and technology. Defensive sectors including consumer staples, real estate, and utilities saw modest outflows as investors’ risk-on bias continues into May.

Overall, investors re-applied force to the accelerator with 72% of all in-flows over the past month headed into equities.

The spread between rolling three-month flows into equities and high-quality fixed income (z-scores) still looks very ripe for mean reversion. Demand for aggregate and corporate bond funds have safe asset flows rebounding from flat. Remember only the taper tantrum in 2013 saw a multi-month period of steady outflows. 

The continued deceleration in sector-specific equity flows has been a sign investors are looking for more balanced, diversified alternatives. Not surprising, broad, large cap funds were the greatest benefactor in April.

Inflation-friendly assets remain in demand, but at a reduce rate of in-flows led by energy. TIPS-related funds continue to see a healthy $2.73 billion of flows on a rolling one-month basis. Additionally, industrial and materials equities have yet to go out style with nearly $2.7 billion of flows on their own.

Investors’ fervent rush into broad-based commodities peaked March 15th, but remain remains consistent heading toward the summer months. Phenomenal risk-adjusted returns from aluminum to polymers have investors remaining enthusiastic on intermediate goods.

On the flip side, investment grade corporate bond funds are enjoying the strongest rolling one-month in-flows at $4.9 billion since December 2020. High yield and investment grade corporate bonds have begun stealing share from aggregate bond funds.

US Treasuries have yet to see consistent demand across the curve with little to no risk-off economic data releases or news. Short-term maturities have been in demand over the past month, while long-term maturities have again fallen out of favor.

Lastly, investors have been piling into real estate funds over the past quarter to the tune of $4.1 billion. The reopening of metros have investors turning bullish on REITs. 




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