Following a strong first half this year for both U.S. mutual funds and ETF assets, many industry leaders are keeping a positive outlook for the remainder of 2015.
Despite uncertainty surrounding the first significant interest rate hike from the Federal Reserve in the past decade, lower long-term interest rates have provided grounds for continued improvement in the U.S. economy, according to the Investment Company Institute.
ETFs continue to graduate into the role of investment vehicle of choice, while passive management has remained the choice among portfolio management methods.
Shundrawn Thomas, the head of funds and managed accounts group at Northern Trust, says index-managed strategies have also seen significant popularity across diverse asset classes, beyond just equity.
"You're seeing it move into different kinds of strategies," Thomas says.
"You hear people popularize things like smart beta. We don't tend to use that term, but it's certainly how, on the ETF side, our products are characterized."
MORE MATURE
Although long-term strategies have slowed in the last couple of months, the overall U.S. mutual fund industry remains the largest in the world at roughly $16.2 trillion in total assets, according to ICI.
The ETF industry continued to see steady inflows in the first half of 2015, up nearly $72.5 billion for a total of $2.12 trillion in overall industry assets under management, according to Dave Mazza, head of research for SSGA Funds and SPDR. Meanwhile, bond fund assets were at $321.88 billion while hybrid funds were at $3.63 billion, ICI reports.
As of April 2015, global equity funds reached nearly $518.8 billion, up from $472.5 billion in the month earlier. "Investors are looking beyond U.S. borders for opportunities and more attractive valuations in international markets," Mazza reported. "This flow trend may also reflect lower-than-expected recent U.S. economic growth."
Equity flows, at nearly $42.3 billion year-to-date, outpaced fixed income exposures in major asset classes, Mazza found. Investors have since moved towards currency-hedged ETFs that seek to limit foreign exchange risks surrounding investments in foreign currencies.
"Even compared to a couple of years ago, it's clear that the ETF market is much more mature," says Kevin Chen, the chief investment officer at Three Mountain Capital. "If you look at the bid of the spread, you look at the liquidity, you look at the choice of different kinds of ETFs that we can trade - it's much better now and I think also that the industry has shifted toward ETFs."
For the future of ETF products, CLS Chief Investment Officer Rusty Vanneman says a growing interest in smart beta will ensure that it continues to perform, especially internationally.
"Some industry estimates peg annual growth at 30% for the next handful of years for smart beta ETFs," Vanneman notes. "Given their cost advantages, it's hard to see why they won't continue doing well."
MUTUAL FUNDS
The U.S. mutual fund industry was up $818 billion from year-end 2013 to nearly $16.18 trillion in total assets at the end of 2014, a boost research firm ICI says comes mostly from appreciation of stock and bond prices.
Long-term funds like equity, hybrid and bond funds saw total net inflows of $5.6 billion in the last month, down significantly from the $15.5 billion inflows just a month earlier in March 2015, the ICI reports.
Total assets for long-term funds, across all third party distributors, were up 9.5% year-over-year to $665 billion, according to data from Broadridge Company.
In the institutional channel, banks saw the most growth from mutual fund assets, growing funds by 23% to a total $147 billion, Broadridge reports. Meanwhile, money market funds saw significant outflows last month, nearly $81.3 billion, compared to $32.52 billion in March, ICI says. Funds offered to institutions had outflows of $56.88 billion while outflows to individuals saw outflows of $24.4 billion, the research firm notes.
"We think it's clear that a lot of larger asset management firms, mutual funds and pension funds; they are shifting assets into ETFs," Chen says.
INTEREST RATES
While interest rates have remained low since 2008, growing talk surrounding interest rate hikes has become a common among asset managers.
For many, 2015 is the year interest rates move from zero to positive territory since the crisis of 2008, Vanneman suggests.
"Interest rates have already risen quite a bit this year," he explains. "Investor sentiment meanwhile has gone from bullish back at the year's interest rate lows, to now bearish."
He adds that the likelihood of additional interest rate increases is much lower in the coming months, "Unless we see a notable pick-up in nominal economic growth, it is something we do not anticipate at present."
Chen says he too is surprised the Fed has not already taken steps to increase interest rates, adding that the market has found ways to work around the potential increase.
"I think in the ETF market, people that have been trading around this increase seem very active on the government treasury ETFs and options on top," he says. "So, it's a very good opportunity for investors to express their views on interest rates."
ALTERNATIVE STRATEGIES
At Northern Trust, Thomas says that investors have shown bias of the traditional 60/40 investment vehicle and that there has been a shift towards investing in real assets, like natural resources of infrastructure. Although he says it has been only a small move, more portfolios are expected to lean towards energy and natural resources over the long term.
He adds that with a growing emphasis on non-traditional investment strategies, asset managers are now looking for ways to get efficient exposure to asset risk.
When investors spoke of alternative strategies 15 years ago, they typically referred to private hedge funds or equity, Thomas explains. Today, he says, the emphasis on more efficient investment portfolios has managers asking: "Can I replicate those kinds of strategies? Can I even do it in a more liquid vehicle?"
