Positioning Toward Yield and Value Equities

2018 equity style performance trends have been all about growth. Yet, lately, we’ve written about increasing flows into the value factor, which has shown strength when highly priced technology shares have sold off. Investors have viewed these sell offs as an opportunity to take profits and rotate into shares that are underpriced relative to their fundamentals, hoping these value stocks can turn around their performance and help portfolios preserve the gains that have accumulated during the past decade.

Thus, October saw a continuation of value’s flow momentum, as the category picked up $2.6 billion in net new flows. Another factor that has struggled is yield, which has been down significantly given the increase in borrowing costs. But recent defensive posturing has renewed interest in these high-dividend funds; investors have now placed $1.6 billion net new into the category over the past two months, the most since October and November 2017.

Record Monthly Outflow for High Yield

As rates have risen furiously this year, it has been a difficult year for all sorts of fixed income, especially anything with duration. But with the U.S. economy humming along, high-yield fixed income has been a relatively strong performer in a weak crowd, and junk bond credit spreads have largely narrowed to record tights relative to investment-grade. Yet, amid some weak performance from the energy sector, October saw this swiftly reverse, and in fact credit spreads moved to their widest levels all year.

Against this backdrop, investors redeemed $4.1 billion in high-yield ETFs, a record monthly outflow for the high-yield category. This October’s “redeem high-yield” trend is not abnormal – the category has seen net outflows in six of ten 2018 months, and even a fair amount of “create-to-lend” activity, with several big high-yield funds at record high short-interest levels. Also of note, investors plowed into ultra-short duration funds to the tune of $5.8 billion, adding to record year-to-date inflows for the category at $29.5 billion. The next closest yearly total came in 2017, with only $11.1 billion in net new flows. Participants have been feverishly lowering duration exposure amid rising rates.

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