Will Fed Actions Spook Retirement Assets Away From Mutual Funds?

It isn’t news that in the past decade, investors have been moving their assets from higher fee fund products to lower fee products.  Since early 2019 a new trend may be emerging, where investors pull from long-term strategies, like equity, to cash. Normally, a move to cash is an expected flight to safety during a bear market.  

But was 2019 a bear market?  If not, what’s going on?

Is the Fed’s wider and deeper efforts to monetize all liquidity-challenged assets about to have an unintended consequence, or one expected from a breakdown in moral hazard?

Are we entering a decade where depreciating cash is considered a safer long-term investment than equities and long-term bonds?  I know, crazy talk.  But I find it interesting nonetheless.

Most investors expect to achieve capital preservation through equities or similar long-term products.  According to the ICI, the asset-weighted total expense ratio for equity is 0.52% and Money Markets 0.25%.  Needless to say, both investors and fund managers earn better margins on long-term assets.

If I have Corporate Long-Term Bond ‘A’ and something happens to it where the Fed buys it, might not I worry that next time the Fed may not buy it from me?  So if I’m worried about that possibility, might I start transitioning more of my assets into cash so I don’t end up out of luck if the Fed pulls its support back?

For whatever reason, I’m seeing a generalized movement into cash.  To analyze this, I have to remove the continual change in asset prices and interest rates which make it difficult to track margins.

To factor out those effects, I take every fund’s assets as of January 2019 and add to each the following month’s net flows.  I then multiply those asset-weighted (by objective) management fees by the assets of each fund.  Finally, I total them for each month. 

For January, 2019 I calculate $59 billion in management fees (excluding VAs and ETFs).  A year later, January 2020 the fees are at $56 billion, or a 3% drop.  Again, we’re not measuring changes in product (I hope).  

The trend strengthens considerably between January and April 2020, when the industry revenues fall another 5%.  

The chart above shows these subtle changes.  I don’t understand why the money markets show so much volatility.  My guess would be investors move money around quickly and managers are continually changing their reimbursements.  Something to study later.

I have also not looked deeply into flows between mutual funds and ETFs, or institutional money markets.

If investors are leery of the Fed’s increased asset-based backstops it may do the very thing the Fed is trying to prevent–sitting on cash. Once again, the issue of moral hazard is brought to the fore.

I provide data and analysis on fund related subjects.  Please feel free to contact me with any comments or questions!