May Meditations

The old proverb of “In like a Lion, Out like a Lamb” almost perfectly sums up the market action for the month of May where the S&P 500 started with a strong 1.08% gain and then made a new high on the 20th before investor sentiment turned negative leading to a retreat where Friday’s closing level of 2,107.39 was just below that of May 1st.

While investors told themselves that at least U.S. equities outperformed the horror show of the emerging markets like Brazil, South Africa and Russia, the on-going breakdown of the Dow Jones Transportation Average and with the venerable DJ Industrial Average just holding it’s 200 day moving average has some wondering if it isn’t time to “sell in May and go away.”  With our May now in the history books, we’ve decided it’s time to check-in on monthly fund flows to find out if investors are doing just that or whether there might be hope for the bulls after all.

Looking back at May, the biggest winners of 2015 continued to pull in new assets as investors sought refuge from their Fed-induced anxiety.  While European investors are beginning to brace for the very real possibility of a Greek exit from the EU, the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF) continued to dominate in 2015 by adding another $785 million in new assets to take its three month total to over $7.76 billion and while Vanguard FTSE Europe’s (VGK) $813 million take helps it close the gap with DBEF, with “only” $2 billion in new assets in those same three months, it still has a long way to go before catching up.  And while those brave souls who venture into the China A-share market find themselves being tossed around by the shifting tides of liquidity over the last few days, the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) saw a monthly inflow of new capital equal to 12.5% of its assets.

Back here in the U.S., the shape of things to come continues to be determined by when investors think the Fed will beginning raising rates and has bond investors taking different tacks.  Two bond funds suffered substantial outflows as the release of the April FOMC meeting minutes revealed the members still believe that the economic weakness will be transitory with the worst pain falling on the iShares 20+ Year Treasury Bond ETF (TLT) that saw a nearly 18% outflow as some investors continue to heed the Fed’s warnings.  Others with a more short-term bent are speculating that rates won’t be rising till the fall  leading to a nearly 30% drop in assets at the iShares Short Treasury Bond ETF (SHV) fund as investors reduced their immediate need for duration protection.  The outlook for domestic equities remains murky; few sector-specific funds made our short list and nearly all of the SPDR select sector funds recorded outflows for the month.

If there’s one segment of the market that has yet to feel the pinch, it’s the high-flying healthcare industry, where M&A fueled speculation has helped keep investor expectations (and returns) high. The Healthcare Select Sector SPDR (XLV) is up 9.9% YTD compared to a more modest 3.18% for SPY but even that strong return for a broad sector fund puts XLV near the bottom of the pack for healthcare funds thanks to the strong performance of biotech names.  Larger biotech funds like the iShares Nasdaq Biotechnology ETF (IBB) and the SPDR S&P Biotech ETF (XBI) continue to deliver sizzling year-to-date returns of 20.33% and 27.87% respectively and even then they still lag newer (and smaller) BioShares Biotechnology Clinical Trials (BBC) with a 29.06% return in 2015 that puts the fund in the top decile of healthcare funds according to Morningstar.  And while we’d like to take some of the credit for the success since featuring BBC in our “New-to-Market” segment, the credit goes to names like Synageva Biopharma (up 129% in 2015) and bluebird Bio (up 111.79%) but with buyout fever spreading to large-cap names like Humana (now up 49.69%) and Pittsburgh’s own Mylan (28.85%), investor demand for healthcare would be understandable.

But after digging into the numbers, we were surprised to see that even the healthcare sector isn’t completely immune to increasingly cautious behavior by investors as inflows to the hottest segments of the sector have dried up to a trickle.  IBB and XBI might continue to dominate the assets in the biotech sector, both funds have seen slight outflows in May (1.26% and 1.9% of AUM respectively) but even as investors are taking profits in biotech, they continue to pour new funds into broad based healthcare funds, with XLV taking in another $589 million in May to bring the YTD total to $1.342 billion.  Putting that into perspective, the fund “only” took in $1.4 billion for all of 2014!  What might give investors pause is that some of that share creation is for increased shorting where XLV ranks behind only XLK for highest relative short interest while buyers have simultaneously pushed prices to the point where XLV has the second highest p/e ratio of all the sector ETF’s trailing only XLE.  While XLV might be hanging in there for now, how much further can it separate from the market?

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