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.
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