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Risk speedometers: Fourth quarter 2018

06 March 2019 | Todd Schlanger

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  • Risk appetite increased to slightly above average in the fourth quarter of 2018.
  • Risk appetite was reasonably well balanced over all periods ending December 31, 2018.
  • Canadian equities led all asset categories in positive net cash flow, a departure from prior quarters.

Vanguard risk speedometers measure the difference in net cash flow between higher-risk asset classes, such as stocks, and lower-risk asset classes, such as fixed income, to gauge the level of risk investors are taking in a given period. We then compare the current level of risk-taking with prior periods and longer-term averages.

In this post, we update our risk speedometers for the fourth quarter of 2018 and find that risk appetite was reasonably well balanced in the quarter and for the year ending December 31, 2018.

This is good news for Canadian investors, as they remained well balanced in their investment decisions even as stock market volatility increased toward the end of the year. Of course, given that investor behaviour often lags developments in the capital markets, we will continue to monitor this in the future.

In the fourth quarter, global equities trailed global bonds by –9.96% and Canadian equities trailed Canadian bonds by –12.60%. Over the 12 months ending December 31, 2018, however, global and Canadian equities trailed their corresponding bond markets by –3.07% and –11.51%, respectively.

Against this backdrop, we update our risk speedometers in Figure 1 and find that, overall risk appetite increased to slightly above average in the fourth quarter, from slightly below average in September. Over longer periods, there was a modest decrease in risk appetite over the past 6- and 12-month periods.

Figure 1: Vanguard's Canadian risk speedometers as of December 31, 2018

Notes: Vanguard's risk speedometers measure the difference between net cash flows into higher-risk asset classes and lower-risk asset classes, in this case within the universe of Canadian mutual funds and ETFs. The lighter-shaded areas represent values that are within one standard deviation of the mean, which means they occur roughly 68.2% of the time (34.1% higher and 34.1% lower). The middle shades represent readings between one and two standard deviations from the mean, occurring 27.2% of the time (13.6% higher and 13.6% lower). The dark edges represent values more than two standard deviations from the mean, occurring the remaining 4.6% of the time (2.3% higher and 2.3% lower). Speedometer values for previous periods may change from what was initially reported as the current value in prior periods because of changes made in Morningstar, Inc., data, and to the updating of the five-year average.
Sources: Vanguard calculations, using data provided by Morningstar, Inc., as of December 31, 2018.

A more detailed look at cash flows relative to returns

While our risk speedometers offer a broad view of investor behaviour, there can also be value in looking at more detailed cash-flow data. To that end, the tables in Figure 2 show cash flows over a wide range of periods and also the categories' relative return performance.

The top left square, for example, tells you that for the quarter ending December 31, 2018, Morningstar's Canadian equity category had the largest absolute inflows, while its return placed it 50th out of 60 categories.

Figure 2: Net cash flows by investment category in absolute dollars

Top ten net cash inflows by category with return rankings

Top ten net cash outflows by category with return rankings

Notes: Data represent mutual funds and ETFs available for sale in Canada as of December 31, 2018. Currency is Canadian dollars.
Sources: Vanguard calculations, using data from Morningstar, Inc.

We examine net cash flows by investment category in Figure 2 and find that Canadian equities were the top attractor this quarter, followed by money markets. This is somewhat of a departure from prior quarters as Canadian investors have been favouring global equities, which fell to third this quarter, but remain the top attractor over the past 6- and 12-month periods. Flows into income-oriented categories, which were prominent last quarter, have moderated. Finally, volatility-based investments, which made an appearance in the top 10 inflow categories last quarter, fell significantly over the most recent period.

A more detailed look at cash flows relative to assets under management

The tables in Figure 2 provide detail on the largest flows from an absolute dollar perspective. Because flows for categories with large existing AUM are common, it's important to keep an eye on flows as a percentage of assets under management. The tables in Figure 3 provide that narrower view.

Figure 3: Net cash flows by investment category relative to assets under management

Leaders

3-month inflows (% of AUM) 6-month inflows (% of AUM) 12-month inflows (% of AUM)
Category % of AUM Category % of AUM Category % of AUM
Misc-Undisclosed Hldgs 623.3% Misc-Undisclosed Hldgs 604.1% Misc-Undisclosed Hldgs 803.8%
Trading-Misc 91.5% Floating Rate Loans 12.2% Floating Rate Loans 45.4%
CAD Money Market 7.7% Asia Pacific ex-Japan 8.6% US Money Market 28.4%

Laggards

3-month inflows (% of AUM) 6-month inflows (% of AUM) 12-month inflows (% of AUM)
Category % of AUM Category % of AUM Category % of AUM
Volatility -75.9% Volatility -35.3% Volatility -99.6%
Large Blend -9.1% Large Blend -23.5% Multicurrency -51.1%
Tactical Bal -5.4% Greater China Eqty -12.5% Single Currency -39.5%

Notes: Data represent mutual funds and ETFs available for sale in Canada as of December 31, 2018. Currency is Canadian dollars.
Sources: Vanguard calculations, using data from Morningstar, Inc.

When examining relative net flows by investment category (as a percentage of assets) in Figure 3, these tables contain mostly smaller and/or specialty asset categories. It is worth highlighting that the +800% figure for "Misc-Undisclosed Hldgs" was impacted by flows into a newly launched fund.

We will continue to monitor the risk appetite and net flows for Canadian investors and comment on these and other trends next quarter.

Important information:

The views expressed in this material are based on the author's assessment as of the first publication date (February 2019), are subject to change without notice and may not represent the views and/or opinions of Vanguard Investments Canada Inc. The author may not necessarily update or supplement their views and opinions whether as a result of new information, changing circumstances, future events or otherwise.

This material is for informational purposes only. This material is not intended to be relied upon as research, investment, or tax advice and is not an implied or express recommendation, offer or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy. Any views and opinions expressed do not take into account the particular investment objectives, needs, restrictions and circumstances of a specific investor and, thus, should not be used as the basis of any specific investment recommendation.

Please consult your financial and/or tax advisor for financial and/or tax information applicable to your specific situation.

While this information has been compiled from sources believed to be reliable, Vanguard Investments Canada Inc. does not guarantee the accuracy, completeness, timeliness or reliability of this information or any results from its use.

Information, figures and charts are summarized for illustrative purposes only and are subject to change without notice.

In this material, references to "Vanguard" are provided for convenience only and may refer to, where applicable, only The Vanguard Group, Inc., and/or may include its affiliates, including Vanguard Investments Canada Inc.

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