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The Shifting Flow of Capital – The Financial Preserve from Lonier Financial Advisory LLC
Conscientious Financial Planning and Retirement Income Management | 201-741-9528
from Lonier Financial Advisory LLC, Osprey, FL

The Shifting Flow of Capital

The Shifting Flow of Capital

A couple recent reports give some indication that the world of investing continues to change.

Investment News reports that while total assets under management in the advisory industry has recovered above re-2008 crash levels to $11.2 trillion, four big brokerages, Merrill Lynch, Morgan Stanley, UBS, and Wells Fargo, have lost a trillion dollars in client assets under management since then. The $300 billion BofA brought to Merrill Lynch during the 2009 acquisition softened the drop overall at the bank, but the drop at Merrill Lynch has been significant. Across the four, industry market share fell from 50% to 43%, with another 8% estimated drop by 2014 if the trend continues.

The erosion of high-worth clients at the big firms was even worse, an 11% drop from 56% to 45% market share, which suggests that Merrill-Lynch’s recently adopted strategy of focusing exclusively on large accounts may be running against a strong tide.

In the mutual fund world, Morningstar reports $85 billion flowed out of U.S. equity mutual funds in 2011, with $130 billion flowing into taxable bond mutual funds. Overall, including money market funds, the $7.9 trillion total value in mutual funds fell about $23 billion for the year.

Passively managed indexed mutual funds had $76 billion inflows while actively managed funds had $9.4 billion in outflows. Actively managed mutual funds still dominate with 85% of the funds invested.

This is the 6th consecutive year of net outflows from U.S. equity mutual funds. Over $350 billion has been redeemed from U.S. stock mutual funds since 2006. IndexUniverse.com estimates that ETFs (exchange traded as opposed to mutual funds) held $1 trillion in assets at year end, the majority passively indexed. Further, they report that U.S. equity ETFs had overall net inflows of $41 billion during 2011.

According to IndexUniverse.com, Vanguard, which pioneered indexed funds, had $29 billion in new mutual fund assets and $35 billion in new ETF investments in 2011. Over $500 million flowed into SPY on Tuesday this week, the ETF that tracks the S&P 500, and almost a billion into ETFs over all.

Watching this shifting river, what can you see in the fast-moving flow? A few things, but dangerous to generalize too much:

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  • Investors have been especially wary of U.S. stocks since the 2008 crash
  • Investors are drifting away from large brokerage houses
  • Investors are leaving traditional U.S. equity mutual funds
  • Investors are  beginning to favor passive over active mutual funds
  • ETFs are becoming a larger part of daily investor activity


Are these long terms trends related to a move towards passive strategic asset allocation and lower cost investing methods? Or are they just market reactions stemming from the two market crashes in the past ten years that a big rally will push to the side? Or maybe a mix of both?

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