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Where Investors Put Their Money in 2018

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Where Investors Put Their Money in 2018

This infographic is available as a poster.

Where Investors Put Their Money in 2018

For most investors, 2018 was both an eventful and frustrating year.

Between the looming threat of trade wars and growing geopolitical uncertainty, the market also skipped a beat. Volatility took center stage, and the S&P 500 finished in negative territory for the first time in 10 years.

Although many asset classes finished in negative territory, a look at fund flows – essentially where investors put their money – helps paint a more intricate picture of the year for investors.

Visualizing 2018 Fund Flows

Today’s infographic comes to us from New York Life Investments, and it visualizes the flows in and out of U.S. funds for 2018.

It not only shows when investors poured money into mutual funds or ETFs, but it also breaks down these funds by various categorizations. For example, when did people buy funds that held U.S. equities, and when did they buy funds that primarily held money market securities?

Let’s dive into the data, to take a deeper look.

Mutual Funds vs. ETFs

For another year in a row, ETFs gained ground on mutual funds:

Type of Fund2018 Fund FlowsTotal Assets (End of Year)
ETFs+$238.4 billion$3.4 trillion (17.2%)
Mutual Funds-$91.3 billion$16.3 trillion (82.8%)

However, despite growing for another year, ETFs still make up a smaller part of the overall fund universe.

Flows by Asset Class Group

Every fund gets classified by Morningstar based on the types of assets it holds.

For example, a fund that focuses on holding fast-growing, large tech companies in the U.S. would be classified broadly as “U.S. Equity”, and more specifically as “U.S. Equity – Large Growth”.

Here’s how flows went, within these broader groups:

Fund Category GroupTotal Assets ($mm)Growth in 2018
Allocation$ 1,171,166-5.9%
Alternative$ 203,343-5.7%
Commodities$ 88,9392.4%
International Equity$ 2,787,4003.1%
Money Market$ 2,879,5106.2%
Municipal Bonds$ 795,1320.9%
Sector Equity$ 816,149-3.7%
Taxable Bonds$ 3,747,2683.5%
U.S. Equity$ 7,173,9020.0%

Investors pulled money from Allocation, Alternative, and Sector Equity funds, while rotating into Money Market and Taxable Bonds categories. These latter assets are considered safer, and this shift is not surprising considering the market volatility towards the end of the year.

Also interesting here is that U.S. Equity – the biggest category overall by total assets – saw equal amounts of inflows and outflows, ending with a 0.0% change on the year.

U.S. Equity: A Closer Look

U.S. Equity ended the year with zero change, but it’s also the biggest and broadest category.

Let’s break it down further – first, we’ll look at what happened to flows by market capitalization (small, mid, and large cap stocks):

Market CapitalizationAssetsGrowth (2018)
Large Caps$5.6 trillion0.2%
Mid Caps$884 billion-2.5%
Small Caps$672 billion1.7%

Investment in funds that held large cap stocks increased by 0.2%, while the money allocated to small caps rose by 1.7% over 2018. Interestingly, investors pulled money out of mid caps (-2.5%).

Now, let’s look at U.S. Equity by type of strategy:

Fund StrategyAssetsGrowth (2018)
Growth$2.0 trillion-2.1%
Value$1.4 trillion-2.8%
Blend$3.8 trillion2.2%

According to these flows, investors pulled money from funds focused solely on value or growth, while instead preferring funds that were a blend of the two strategies.

International Equities

Finally, let’s see the types of international funds that investors bought and sold over 2018.

RegionGrowth (2018)
China35.5%
Diversified Emerging Markets4.9%
Latin America4.3%
Foreign/World3.9%
Diversified Asia/Pacific-5.6%
Pacific/Asia ex-Japan-7.1%
Japan-9.0%
India-11.3%
Europe-23.4%

Investors eschewed funds that had a primary focus on European, Indian, and Japanese markets, while piling into funds that held Chinese equities. Meanwhile, Latin America and emerging markets also got some love from investors.

Conclusion

While 2018 was an eventful year for markets, this recap shows that investors are adjusting their portfolios accordingly.

Where will investors put their money in 2019?

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Infographics

How Carbon Offsetting Works, and What Investors Should Know

Eliminating all harmful GHG emissions is not yet possible, but carbon offsetting offers a route for businesses and funds to become more sustainable.

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Carbon Offsetting: What Investors Should Know

In 2016, an international treaty known as the Paris Agreement was negotiated by member nations of the UN Framework Convention on Climate Change.

The long-term goal of this agreement is to limit the increase in global temperature to below 3.6°F (2°C) over the next century. Achieving this target will require the world to develop cleaner solutions across all areas of the economy, from energy to transportation.

In this infographic from New York Life Investments, we introduce carbon offsetting, an activity used by both businesses and investment funds that has the potential to accelerate the development of a more climate-friendly economy.

What are GHG Emissions, and Where do They Come From?

Greenhouse gases (GHGs) are a family of gases known to trap heat in the Earth’s atmosphere. The most prevalent among them is carbon dioxide (CO₂), which accounts for 80% of America’s GHG emissions. Common sources of CO₂ include fossil fuel consumption and deforestation.

Businesses are often significant emitters of CO₂, but due to the complexity of their production chains, emissions can be difficult to track. To combat this, a company’s carbon footprint is measured across three scopes:

  • Scope 1: These are direct emissions from a company’s operations. An example would be the CO₂ emitted by company-owned factories.
  • Scope 2: These are indirect emissions from a company’s operations, such as the pollution generated from purchased electricity.
  • Scope 3: These are indirect emissions from the company’s supply chains. Common sources include the extraction of raw materials and business travel.

Although we understand that GHGs are harmful to the planet, our ability to eliminate them is limited by technology and costs. Fortunately, this is where offsetting can help.

How Does Carbon Offsetting Work?

Carbon offsetting is a method of neutralizing one’s emissions by investing in GHG-reducing projects. The benefits of these projects are measured by the amount of CO₂ equivalent (CO₂e) that they avoid or absorb. Then, the company or fund that is engaging in the carbon offsetting project will then receive one carbon credit for every tonne of CO₂e negated.

Below are the three common types of GHG reduction programs.

1. Energy efficiency projects

These projects reduce energy consumption. One example is the distribution of energy-efficient cookstoves in Rwanda, a country where many people rely on firewood and charcoal. By distributing 10,800 cookstoves throughout the country, nearly 60,000 tonnes of CO₂e can be avoided each year.

2. Forestry projects

These projects nurture and protect our CO₂-absorbing forests. One notable example is the Garcia River forest protection program, which ensures the longevity of California’s redwood forests. The program oversees over 9,600 hectares which has been estimated to store almost 80,000 tonnes of CO₂e annually.

3. Renewable energy projects

These projects reduce our dependency on fossil fuels. They are especially effective in economies such as Taiwan, where 75% of electricity capacity relies on fossil fuels. Thanks to its strong coastal winds, Taiwan is able to remove 328,000 tonnes of CO₂e per year with just 62 wind turbines.

How is Offsetting Regulated?

Carbon offsetting in America is primarily a voluntary activity, but some state governments have made it mandatory for significant polluters. Here’s how both markets are regulated.

The Voluntary Market

The voluntary market is regulated by a variety of third-party organizations such as Verra, Gold Standard, and American Carbon.

They conduct audits on GHG reduction projects to ensure each one meets four broad criteria:

  • Measurability: The GHG savings of the project must be measurable
  • Verifiability: The results of the project must be verified on an annual basis
  • Sustainability: Each project should have a minimum lifespan of seven years
  • Additionality: GHG reductions of project must be considered in reference to a baseline scenario

Carbon credits are only issued after a project has passed this verification process.

The Mandatory Market

Some U.S. states have introduced carbon offsetting schemes to meet their climate goals. One of the largest is California’s Cap and Trade program which was introduced in 2013.

The program is targeted at businesses that emit over 25,000 tonnes of CO₂e annually, and works by setting a “cap” on total annual emissions. This cap is reduced each year, and overpolluting businesses must acquire carbon credits to offset their excess pollution. These can be purchased from state-administered auctions or from other firms.

Revenues generated from California’s carbon credit auctions are used to fund various GHG reduction projects, including:

  • 690,000 acres of land preserved or restored
  • 287,000 rebates issued for zero-emission and plug-in hybrid cars
  • 108,000 urban tree plantings
  • 150,000 energy efficiency projects installed in homes

By 2030, California’s emissions cap is intended to reach 200.5 million tonnes of CO₂e, marking a near 50% reduction from its 2015 level.

What Role can Investors Play?

A majority of U.S. investors consider themselves to be values-based, meaning they care about the societal and environmental impacts of their investments. This mentality is increasing the demand for ESG investing and placing pressure on corporations to become more sustainable.

For example, the percentage of S&P 500 firms that publish sustainability reports has risen from just 20% in 2011 to 90% in 2019. More importantly, a growing number of U.S. firms are cooperating with the CDP (formerly the Carbon Disclosure Project) to report their emissions and set formal reduction targets.

YearCompanies with active emissions reduction targetsAll other companies reporting to the CDPTotal
2013322166488
2014335164499
2015365143508
2016378124502
2017385123508
2018389117506
2019419138557

Source: CDP 2020

Some of the world’s largest oil producers are also taking action—a testament to the significance of these shareholder concerns. Royal Dutch Shell announced earlier in 2020 that it intends to fully offset its Scope 1 and 2 emissions.

Does Offsetting Really Help?

Carbon offsetting programs such as the one implemented by California have the potential to generate revenues and encourage innovation. Critics, however, have suggested it has a number of design issues.

One such issue is the fact that California’s carbon credits do not expire. This could allow companies to stockpile credits and ignore future cuts to the emissions cap. Another concern is that the companies covered by California’s cap and trade will simply pass their higher costs to the consumer, although this claim didn’t seem to hold up in a 2016 study conducted by UCLA.

Other inefficiencies within the program may exist, but its benefits are hard to ignore. By the end of 2019, the revenue generated from California’s carbon credit auctions totaled $12.5 billion. Of this amount, over $5 billion has been invested in GHG reduction projects to date.

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Infographics

Tech Investing: Exploring the Sector’s Promising Potential

In the first 9 months of 2020, tech’s return was almost 5x greater than the general market’s return. Here’s what you need to know about tech investing.

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tech investing

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Exploring the Potential of Tech Investing

Technology stocks have had impressive momentum. In the first 9 months of 2020, the S&P 500 Information Technology sector had a total return of 28.69%—far exceeding the S&P 500’s total return of 5.57%.

What should investors know about participating in this trending sector? This graphic from New York Life Investments covers tech’s long-term performance, the broad tech universe, and what investors should consider when analyzing tech investments.

Tech’s Performance

Since most tech companies are internet-based, COVID-19 has caused minimal disruptions to their business operations. In a number of cases, tech companies even saw sales growth as they benefited from consumers going online during lockdown.

Over a longer timeframe, however, tech’s performance is quite varied.

 S&P 500 Information TechnologyS&P 500 
201010.19%15.06%
20112.41%2.11%
201214.82%16.00%
201328.43%32.39%
201420.12%13.69%
20155.92%1.38%
201613.85%11.96%
201738.83%21.83%
2018-0.29%-4.38%
201950.29%31.49%

Data based on total returns.

Tech underperformed the general market in 2010, 2012, and 2013. However, the sector has outperformed every year thereafter.

In total, investors who held tech stocks over the last decade would have been rewarded. The 10-year annualized return for the S&P 500 Information Technology index was 20.50%, compared to 13.74% for the S&P 500.

The Tech Universe

While the information technology sector is commonly used to represent tech stocks, the broader tech universe can be broken down into 4 business types:

  • Software – such as application software, fintech, and cybersecurity.
  • Hardware – such as electronic equipment, semiconductors, and self-driving cars.
  • Internet Information – such as social networks, e-commerce, and digital advertising.
  • Telecommunication – such as internet services, telephone operators, and cable companies.

In addition, there are other companies that don’t fit neatly into these categories. This includes businesses involved in biotechnology, blockchain, or even retailers with modern technology such as mobile payment systems.

What Investors Should Consider

There are many factors to consider with tech investing.

  1. Diversification
    To lower potential risk, investors can diversify across industries, geographies, and individual companies. Tech investing should also be part of a broader portfolio strategy.
  2. Risks and opportunities
    Tech stocks have unique risk factors, such as regulatory risk arising from data privacy and antitrust concerns. However, they also present specific opportunities: new applications of technology are always being discovered. For example, GPS was originally used by the U.S. Navy to track submarines, but is now used for things like ridesharing.
  3. Personal objectives
    Investors can consider whether they are seeking growth or income. Growth investors can look for newer companies with high growth potential. Income investors may seek mature companies, some of which offer dividends.
  4. Company financials
    It can be tempting to get swept up in the news hype of a particular company. Instead, investors can pay close attention to company financials and reporting to ground their interest in reality.

With all this in mind, how do the sector’s risks measure up against its returns?

Potential Risk/Reward Payoff

Tech stocks have historically been more volatile than defensive sectors, such as utilities and consumer staples. However, they have also generated higher returns relative to their risk level.

Annualized risk-adjusted returns

 3-yr5-yr10-yr
S&P 500 Information Technology1.371.491.28
S&P 500 Consumer Staples0.650.781.06
S&P 500 Utilities0.520.760.84

Risk is defined as standard deviation, calculated based on total returns using monthly values.

By understanding the landscape and what to look for, investors will be poised to take advantage of tech’s potential.

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