BOSTON—More than $1.2 trillion has been redeemed from equity mutual funds since September 2008, and retail outflows year-to-date through September have surpassed $89 billion—on pace to be greater than all of the money that fled mutual funds in 2008, said Ron O’Hanley, president of asset management and corporate services at Fidelity Investments.
O’Hanley made the observation in a keynote speech titled “Where Are Thou, Equities?” at Fund Forum USA’s Global Funds Distribution Summit here Wednesday.
“What has happened to equities?” O’Hanley asked. Two major factors: “First, the flight from equities has become both a cyclical and a secular trend. Second, tomorrow’s requirements for investment results will differ significantly from past success factors.”
Endowments have led the institutional move from equities, O’Hanley pointed out. In 1996, 45% of endowments’ portfolios were allocated to equities. Today, that’s 15%.
Likewise, “among 63% of pension managers, risk avoidance has become more important than returns, with 23% making no change to their portfolios and only 14% seeking higher risk,” O’Hanley said.
“Institutions are looking to immunize or at least de-risk their portfolios—and plan to continue moving away from U.S. equities,” he said. In fact, the most recent annual survey by Fidelity’s Pyramis institutional unit found that 91% of public institutions want more downside protection.
“What is facing equities is something that is quite extraordinary. Up until 2007, flows always followed performance. Flows are not currently following performance. That is now decoupled,” O’Hanley said. “For the careers of most of us, it is something none of us has seen.”
Analyzing why investors are paralyzed in the face of risk, however, the aversion to U.S. stock funds makes sense, O’Hanley said. Retail investors have become highly sensitized to political and monetary influences over the economy. Most are also close to retirement and cannot stomach another big hit to their life savings.
“Retail investors in July saw Congress freezing up over the debt ceiling, and they were getting out,” he said. “Again in October, despite the incredible market recovery, investors were more concerned about volatility. Sixty percent of mutual fund owners are Baby Boomers, and they took a big hit in 2001 and 2008. They are now thinking about how to protect what they have.
“On top of all this, all investors remain wary of ongoing macroeconomic uncertainty—will Europe resolve its sovereign debt, will U.S. become the second Japan, will China boom or bust, will interest rates remain persistently low? And Occupy Wall Street. Its message may be ambiguous, but investors are uncertain how it will play out,” O’Hanley said.
As a result of this dramatic shift in institutional and retail investor sentiment and world economic stage, he continued, “what worked in the past will not work going forward. Winning is going to be harder. Sustained success in equities is really going to require good stock picking, truly global investing and adding value beyond alpha through outcome-oriented solutions.”
-- This article first appeared on Money Management Executive.
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