January 2022 – Flows still bullish … Performance more challenging …

After another day of high volatility – this time caused by a miss from Meta (formerly Facebook) – after what already had been a rather turbulent January, here is a look at Vanguard Canada’s January 2022, both from the perspective of Flows, as well as from that of performance.

Flows – Strong kick -off to 2022

Net inflows are estimated at +CAD 1.383 Billion across Vanguard’s suite of 37 ETFs (versus +CAD 926M for December). Whereas December saw performance contributing a strong +CAD1.05 Billion to year-end AUM, January’s more challenging market conditions dropped CAD1.54 Billion from the firm’s aggregate AUM (CAD48.6 Billion, versus CAD 48.75 Billion as at YE 2021, and CAD 32.8 Billion as at Jan 31, 2021).

As illustrated in this chart, January’s negative market contribution represented the worst drawdown since September 2021, respectively prior to that February and March 2020. Conversely, as observed earlier, net inflows continued on a strong path which notably picked up significantly post November 2020 vaccine news:

The tenor of January’s inflows – challenging market conditions notwithstanding – remained decidedly bullish, with inflows dominated by Equities, primarily US, as well as “one ticket” solutions, the latter category again tilting bullish, with all – equity and Growth ETF portfolios leading the charge in terms of January sales.

Modest redemptions took place in the bond category (totalling an estimated CAD32.8 Million). Asset allocation contributed CAD 377 Million to inflows or about 27.3% of the net CAD1.38 Billion of net sales for the month. As these Vanguard ETFs are comprised of Vanguard ETFs, they effectively represent a double counting. That said, they obviously remain an important driver of sales at Vanguard, quite clearly, when placed in context, generating some CAD 3.2 Billion of sales on a trailing 12 months basis. For perspective, performance contributed +CAD 3.6 Billion to AUM growth over the past twelve months, versus net new unit issuance bringing in CAD 12.356 Billion (77% of 12 months AUM growth). Of that, Asset Allocation ETFs represented 26.8%.

As noted earlier, Bonds – a category likely to remain challenged in 2022 in the context of a FED raising rates to fight inflation – represented a reduced share of Vanguard’s aggregate offering as at Dec 31, 2021 versus a year prior (17% versus 22%, with equities up marginally (66% versus 64%), and Asset allocation continuing to grow strongly now representing 17% versus 14% as at Dec 2020.

Here are the firm’s largest ETFs, an impressive 16 ETFs with over CAD 1 Billion each of AUM (out of 37 ETFs in total), relative to where their respective AUM stood at 12 months ago, with % increase in AUM shown besides 1 year returns:

Takeaways:

  • January’s negative performance notwithstanding, inflows continued to favour equities
  • This is in fact further confirmed by looking at the % AUM growth in the bond category, which is only marginally positive (despite negative 12 months returns)
  • The more equity tilted, the greater the Asset Allocation returns as a result …
  • EM despite negative year/year performance did see some inflows here – will 2022 validate their purchases?
  • as noted, we’ve seen modestly negative flows out of bonds in January. Will investors generally stay put even if performance continues to be challenged. Yes the category does still perform its capital preservation role – mostly – however yield considerations, when couple with heightened inflation, could cause some investors to rethink their exposure (or consider repositioning within fixed income)

 

Noteworthy:

  • January was a difficult month, despite closing out with 2 positive days
  • Global Momentum US equities and Canadian Long bonds stand out with the largest TR losses last month
  • Equally worth noting – Canadian High Dividend Yield ended the month with solid gains. This – of course – could surprise many given the backdrop. A look at the sector exposure will promptly clarify for them. This is a heavily financials concentrated ETF, with meaningful Energy exposure. This, it could be argued, is “New Leadership” in the market place, as it plays into value, reopening, and inflation “hedge” category

Noteworthy:

  • It does indeed look like Canada is in good shape in terms of generating returns outpacing that of other markets. The cyclicality of our market in the context of the reopening suggests this relative performance may continue
  • Speaking about Factors – will Global Momentum regain some ground once the current phase of volatility subsides, respectively the FED has begun its rate hike campaign? The Relative performance of Value, both last month, and on a trailing 12 months basis again suggests a rotation which may continue to play out for the first part of 2022 if not possibly longer.
  • Should a scenario continuing to favour Canada’s Energy sector in particular play out, investors concerned about currency impact may wish to pick the CAD hedged version of ETFs providing US equity exposure, for instance. In other words, while the CAD hedged and non hedged versions performed mostly in line over the past year, this could change in a risk on environment boosted by a successful reopening of the Global economy.