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How Did Investors React to the COVID-19 Outbreak?

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Fund Flows Q1 2020

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How Did Investors React to the COVID-19 Outbreak?

Throughout Q1, investors faced a truly remarkable period of volatility.

For starters, the S&P 500 fell by 30% from its record high in February, achieving the feat in just 22 trading days—the fastest such decline in history. Outside of capital markets, economic damage was abundant. Lockdown orders left entire industries struggling to survive, and unemployment claims across America skyrocketed.

In today’s Markets in a Minute chart from New York Life Investments, we analyze Q1 fund flow data to find out how U.S. investors navigated these highly uncertain times.

Seeking Shelter

A key theme of Q1 2020 was risk aversion, as evidenced by the $670B net inflow to money markets. Money market securities are an ideal investment during volatile periods, thanks to their relatively low risk and high liquidity.

Also of significance was the flow differential between the two main types of investment vehicles. By the end of March, net flows to mutual funds reached $400B, compared to just $58B to ETFs. This difference was fueled by the aforementioned demand for money markets, as mutual funds are the predominant vehicle used to access this asset class.

Below, we break down net flows by asset class, between ETFs and mutual funds:

Asset Class ETF FlowsMutual Funds FlowsNet Flows (Q1 2020)
Total+$58B+$400B+$458B
Money Market--+$670B+670B
International Equity-$1B+$21B+$20B
Commodities+$9B-$1B+$8B
Alternatives+$7B-$7B-$0.1B
Sector Equity-$4B-$7B-$11B
Municipal Bonds+$1B-$21B-$20B
U.S. Equity+$37B-$59B-$22B
Allocation-$0.2B-$33B-$33B
Taxable Bonds+$9B-$163B-$154B

Source: New York Life Investments (March 2020)

Taxable bonds fared the worst in terms of net flows, with -$154B pulled from both corporates and governments. This may come as a surprise, as these investments are generally considered to be safer than equities—so why were they sold off in such large amounts?

One trigger was the economic shock of COVID-19, which brought the creditworthiness of many U.S. companies into question. This issue is likely exacerbated by the record levels of corporate debt amassed prior to the disease hitting American shores.

The U.S. government’s rapidly rising fiscal deficit may be another trigger. If the supply of government debt were to overwhelm markets, the value of government bonds would fall, and investors would lose capital. It’s estimated that $4.5T will need to be borrowed to fund the government’s numerous COVID-19 support programs.

U.S. Equities Divided

Although U.S. equities saw net outflows in Q1, a deeper dive into the flow data uncovers a much more nuanced story. For example, with the exception of February, U.S. equity ETFs and mutual funds saw opposing net flows.

Vehicle TypeJanuary FlowsFebruary FlowsMarch Flows
Total-$14B-$13B+$5B
ETFs+$14B-$2B+$25B
Mutual Funds-$28B-$11B-$20B

Source: New York Life Investments (March 2020)

Overall, ETFs saw net inflows of $37B, while mutual funds saw net outflows of $59B. These findings suggest a strong investor preference for passively-managed products. Breaking down U.S. equity flows by investment style highlights another inequality.

Investment StyleNet Flows (Q1 2020)
Blend+$27B
Growth-$35B
Value-$14B

Source: New York Life Investments (March 2020)

Growth strategies prioritize capital appreciation, while value strategies seek stocks that pay dividends and are trading at a discount. Blend strategies, the only style to attract net inflows in Q1, offer investors a mix of both.

Betting on Oil

Within commodities, investors added $7B to precious metals funds. These inflows were not a surprise, given gold and silver’s status as safe-haven assets.

The only other subcategory to attract net inflows was energy—investors bet on a rise in the price of oil, adding $3B to energy funds over the quarter. Of this amount, $2B was added in March. Since then, oil prices have continued to slide (even falling below zero) due to plummeting demand and oversupply.

What’s in Store for the Rest of 2020?

Volatility is likely to continue throughout 2020. Uncertainty surrounding the duration of the pandemic remains, with countries such as South Korea and China reporting a resurgence in cases. Further questions arise as central banks, including the U.S. Federal Reserve, continue to provide unprecedented levels of stimulus.

Nevertheless, sticking to a long-term investment plan, and avoiding common psychological pitfalls, can help investors prepare for whatever comes next.

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Markets in a Minute

Four Types of ESG Strategies for Investors

Amid a global wave of green investment, this graphic breaks down four types of environmental, social, and governance (ESG) strategies.

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ESG Strategies

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Four Types of ESG Strategies for Investors

In recent years, sustainable investment strategies have shown a number of benefits for investors, from resilience in market downturns to share outperformance in the long-term.

Meanwhile, investor interest has skyrocketed—with environmental, social, and governance (ESG) indexes advancing 40% between 2019 and 2020 alone. Given the increased demand for green investments, investors have an ever-expanding list of options to choose from. But what ESG approach is the right fit for you?

To answer this question, this Markets in a Minute chart from New York Life Investments looks at the primary strategies used in ESG investing to help investors choose the approach that works best for their portfolio.

What Kind of Investor are You?

Broadly speaking, there are four main approaches to ESG investing: ESG integration, exclusionary investing, inclusionary investing, and impact investing.

1. ESG Integration

“I want to integrate ESG factors and traditional factors to assess the risk/reward profile of my investment.”

For example, using an ESG integration approach, a company’s water usage and toxic emissions would be assessed against financial factors to analyze any future risks or investment opportunities.

2. Exclusionary Investing

“I want to screen out controversial companies or sectors that do not meet my sustainability criteria.”

Using an exclusionary investing approach, an investor may screen out companies whose revenues are from tobacco, gambling, or fossil fuels.

Related ESG Terms:

  • Negative Screening
  • Negative Selection
  • Socially Responsible Investing (SRI)

3. Inclusionary Investing

“I want to seek out companies that are ranked highly in their sector based on sustainability criteria.”

With an inclusionary approach, a fund may include the leading companies in a sector, relative to their peers, such as the top performing tech companies in ESG.

Related ESG Terms:

  • Positive Screening
  • Positive Selection
  • Best-In-Class
  • Positive Tilt
  • Thematic Investing

4. Impact Investing

“I want to invest in companies that attempt to deliver a measurable social and/or environmental impact alongside financial returns.”

Lastly, impact investing approaches may focus specifically on renewable energy companies that have the intent to make a positive environmental impact.

Related ESG Terms:

  • Goal-Based Investing
  • Thematic Investing

ESG Investing Strategies, By Market

How does interest in ESG strategies vary according to geographical region? Overall, interest has increased across all regions globally (where data was available).

Interest in ESG By Market*20182020
India98%100%
Mainland China95%98%
UAE90%94%
MexicoN/A92%
France79%91%
Brazil82%90%
JapanN/A88%
Hong Kong, SAR China71%86%
South AfricaN/A83%
Germany64%81%
Singapore77%78%
United Kingdom51%77%
Canada49%68%
Australia49%65%
U.S.49%57%

*With interest in these strategies and already employing them
Source: CFA Institute (Dec, 2020)

At the top was India, where 100% of respondents expressed interest or were already using ESG strategies—up from 96% in 2018.

In fact, India developed National Voluntary Guidelines on Social, Environmental, and Economic Responsibilities of Business as far back as 2011. This was designed as a guideline for responsible business conduct, which later aligned to the UN Sustainable Development Goals in 2016.

Following closely behind were investors in China (98%) and UAE (94%).

By contrast, 57% of investors in the U.S. employed ESG strategies—the lowest among geographic regions. Despite this, in the last two years, this figure jumped 8%, and it may rise higher yet given U.S. president Joe Biden’s new climate priorities. Electric grid and clean energy, decarbonization, and electric vehicle incentives all fall under a massive $2 trillion infrastructure plan, which will likely have a significant impact on the dialogue surrounding ESG.

Going Green

As the global drive for ESG investment continues to rise, investors can harness a greater understanding of different ESG strategies to meet their personal objectives—whether it is risk/reward analysis, seeking out ESG top performers, or a measurable environmental impact.

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Markets in a Minute

Visualizing U.S. Stock Ownership Over Time (1965-2019)

The proportion of U.S. stock owned by foreigners has climbed to 40%, while U.S. stock ownership within taxable accounts has decreased.

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Stock Ownership

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U.S. Stock Ownership Over Time (1965-2019)

The U.S. stock market is the largest in the world, with total U.S. stock ownership amounting to almost $40 trillion in 2019. But who owns all these equities?

In this Markets in a Minute from New York Life Investments, we show the percentage of U.S. stock owned by various groups, and how the proportions have changed over time.

The Groups Who Own U.S. Stock

Based on calculations from the Tax Policy Center, here is the breakdown of U.S. stock ownership as of the year 2019.

CategoryShare of U.S. StockValue
Foreigners40%$16.0T
Retirement accounts30%$12.0T
Taxable accounts24%$9.5T
Non-profits5%$2.0T
Government1%$368B

Foreigners own the most U.S. stock. Their portion of ownership has grown rapidly, climbing from about 5% in 1965 to 40% in 2019. Foreign ownership exists in two forms: portfolio holdings and foreign direct investment. The former includes holdings with less than 10% of voting stock, while the latter refers to voting stock of 10% or more.

Why has foreign ownership increased so substantially? According to the Tax Policy Center, the growth appears unrelated to U.S. corporate tax rates. Instead, the increase is likely a result of globalization, as U.S. holdings of foreign stock climbed at a similar rate over the same timeframe.

Outside of foreigners, the largest domestic ownership groups are retirement accounts and taxable accounts. Stock ownership within taxable accounts has decreased by 56 percentage points since 1965. On the flip side, U.S. households have increased stock ownership within tax-advantaged retirement accounts, which now amounts to 30% of all U.S. stock holdings.

Retirement Accounts: A Closer Look

The proportion of U.S. stock held in defined benefit plans has decreased substantially since 1965.

U.S. Stock Ownership in Retirement Accounts

Note: life insurance separate accounts are reserves that fund annuities or life insurance policies.

This drop is partly due to the general decline in private employers offering defined benefit plans. Since these pension plans guarantee employees a set amount in retirement, they present a large long-term funding burden.

At the same time, there has been a corresponding increase in U.S. stock ownership within defined contribution plans and individual retirement accounts (IRAs). This reflects the fact that many investors are facing more responsibility, as they must take charge of their portfolios in order to build a sufficient nest egg for retirement.

The Future of U.S. Stock Ownership

Compared to 50 years ago, the composition of U.S. stock ownership today looks very different.

Foreign ownership has increased as globalization took hold, though it’s hard to say if this rise will continue. Since 2017, foreign direct investment in the U.S. has decreased. Not only that, China surpassed the U.S. as the top destination for foreign direct investment in 2020.

In addition, the shift to particular tax-advantaged retirement accounts has been a relatively recent one. For instance, IRAs didn’t exist before 1978, and defined contribution plans started becoming popular in 1980. As circumstances continue to evolve, how will U.S. stock ownership change over the next 50 years?

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