Are equity fund net flows on track for a record year?

Equity funds have attracted billions of dollars’ worth of inflows so far this year, propelling gains in funds such as the Vanguard S&P 500 ETF [VOO]. The fund, which invests in stocks in the S&P 500 Index, is up 17.5% in the year to date (through 14 July).

Despite an unpromising start to the year — the Vanguard S&P 500 ETF fell 1% in January — the fund clawed back losses in February, climbing 2.7% throughout the month. A modest dip at the start of March was followed by a streak of growth for the Vanguard S&P 500 ETF, which rose 4.6% during the month.  

  

The fund has seen almost uninterrupted growth since then and gained 8.4% throughout the second quarter to close at $393.52 on 30 June. The Vanguard S&P 500 ETF reached a 52-week high of $402.57 during intraday trading on 14 July before closing at $401.01, marking a gain of 39% in the past 12 months.

 

Funds flowing

Equity fund inflows rocketed in the first half of 2021, with circa $580bn injected globally during the first six months, according to data from EPFR as reported by the Financial Times. At this rate, equity funds could absorb more capital this year than in the previous 20 years combined, according to Bank of America strategists.

Inflows into funds like the Vanguard S&P 500 ETF has driven the US stock market to all-time highs recently. The S&P 500 gained 38.6% in the past year to 30 June to put it at its highest level at the time, but that has since been eclipsed by a 52-week of 4,393.68 that it hit during intraday trading on 14 July. Meanwhile, the Nasdaq gained 52.7% in the same period, making the global stock market worth $117trn, the Financial Times noted.

UK equity funds have also attracted growth, with £6.2bn net inflows during the second quarter, according to Calastone as reported by the FTAdviser. This figure is close to the whole of 2020’s total and beats the previous biggest quarter for UK equity fund inflows, which took in £5.5bn in the third quarter of 2015.

“Even with the most conservative estimates of inflation, your real return on bonds is negative” - Diane Jaffee, portfolio manager at asset manager TCW

 

Part of the global stock market’s appeal has been relatively low bond yields. “Even with the most conservative estimates of inflation, your real return on bonds is negative,” Diane Jaffee, portfolio manager at asset manager TCW, told the Financial Times. Jaffee expects equities to continue their strong performance in the remainder of the year. However, she warns that a sudden improvement in bond yields could dent equity performance.

Additionally, doubts have been raised over the durability of the economic recovery amid a surge in COVID-19 Delta variant cases. These concerns prompted net outflows from US equity funds for the first time in four weeks in the week ended 7 July, according to data from Refinitiv Lipper as reported by Reuters.

The first week of July saw net outflows of $5.2bn, outweighing the previous week’s net inflow of $4.8bn. According to ETFDB, the Vanguard S&P 500 ETF saw net flows of $1.4bn during the week, while the SPDR S&P 500 ETF Trust [SPY] saw $4.5bn of net flows in the same period.

 

Peak season?

Fears over the longevity of the equity fund rally are raising its head. Edward Glyn, head of global markets at Calastone, told FT Adviser: “Financial markets are weighing up whether the blistering speed of this business cycle means it is already time to look beyond to the inevitable economic cooling.”

Jon Adams, a senior investment strategist at BMO Global Asset Management, also believes the current cycle could be peaking. “We know that Q2 is going to be an incredible earnings season,” Adams told Reuters. “The question is could we be at peak earnings growth?” However, Adams suggested that equity funds could continue to benefit if this earnings quarter exceeds expectations.

“Financial markets are weighing up whether the blistering speed of this business cycle means it is already time to look beyond to the inevitable economic cooling” - Edward Glyn, head of global markets at Calastone

S&P 500 earnings per share are expected to increase 66% in the quarter to June, according to Refinitiv data as reported by Reuters, which would be good news for the Vanguard S&P 500 ETF. JPMorgan [JPM] made a positive earnings announcement on 13 July, with EPS of $3.78 beating Refinitiv’s analyst expectations by 17.7%.

JPMorgan is the Vanguard S&P 500 ETF’s seventh-largest holding as of 31 May with a 1.4% weighting, so the earnings surprise is good news for the fund.  However, the fund’s top constituent, Apple [AAPL], has already cautioned investors ahead of its upcoming earnings report that it might not match its record-breaking previous quarter thanks to a global chip shortage.