Blackrock investment insights - Dividend deluge Q2 2013 international - July 2013


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Blackrock investment insights - Dividend deluge Q2 2013 international - July 2013
ETP flows quarterly
July 2013

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Blackrock investment insights - Dividend deluge Q2 2013 international - July 2013

  1. 1. BlackRock Investment Institute DIVIDEND DELUGE etp flows quarterly july 2013
  2. 2. [ 2 ] D I V ID END D ELU G E Dodd Kittsley Head of BlackRock ETP Research Kathleen Van Winckel BlackRock iShares Business Intelligence Ewen Cameron Watt Chief Investment Strategist, BlackRock Investment Institute BlackRock Investment Institute The BlackRock Investment Institute leverages the firm’s expertise across asset classes, client groups and regions. The Institute’s goal is to produce information that makes BlackRock’s portfolio managers better investors and helps deliver positive investment results for clients. Executive Director Lee Kempler Chief Strategist Ewen Cameron Watt Executive Editor Jack Reerink Overall industry inflows fell to $29.6 billion in the second quarter–down from a record first-quarter total of $69.7 billion and the lowest since the first quarter of 2010. See the table above and our interactive graphics. Equities attracted a net $44.2 billion of inflows, led by funds focused on US and Japanese stocks. Bond funds had inflows of $6.2 billion, the lowest in 10 quarters. The commodity rout accelerated, with gold ETPs hemorrhaging $19.1 billion–more than twice the previous quarter’s record outflow. BlackRock collects and analyses industry wide data of roughly 5,000 ETPs globally in monthly ETP Landscape reports. The opinions expressed are as of July 2013 and may change as subsequent conditions vary. Q2 2013 Flows (bn) % of Q1 2013 Assets 12-month Flows (bn) Current Assets (bn) 12-Month Assets Change Number of Funds EQUITIES Developed $56.4 4.6% $192.3 $1,292.8 35.8% 2,092 Emerging -$12.2 -4.4% $31.4 $237.6 11.5% 763 Total $44.2 2.9% $223.7 $1,530.4 31.4% 2,855 FIXED INCOME Corporate -$1.4 -1.2% $16.3 $114.6 15.1% 163 Government $6.4 9.6% $2.9 $72.9 4.3% 332 Total $6.2 1.8% $46 $342.1 13% 747 COMMODITIES Gold -$19.1 -15.2% -$16.7 $78.6 -36.9% 115 Total -$20.8 -11.4% -$15.6 $125.9 -29.4% 922 OTHERS $0.1 0.1% $2.4 $39.3 27.6% 344 GRAND TOTAL $29.6 1.4% $256.5 $2,038 21.5% 4,868 Helicopter View Global ETP Trends, 2013 Source: BlackRock. Data as of 15 July 2013. Notes: Totals include other categories. Government bonds exclude municipal bonds and inflation protected securities. Click for interactive data Dividend Deluge Many income-starved investors have turned to dividend stocks as bond alternatives. Exchange-traded products (ETPs) focused on dividends have rushed to meet this demand. We detail the money flows, country and sector compositions, and most widely held stocks of this group of funds. Highlights include: } Dividend ETPs have gathered $87 billion in assets, accounting for 5.7% of total global equity ETP assets. } The number of dividend ETPs has grown 75% since 2010, outpacing growth in fixed income ETPs and the total ETP market. } Dividend ETP flows closely track ETPs specialising in investment grade bonds–and tend to move inversely with flows into cyclical stocks. } Funds vary greatly in industry sector exposure and yield because of differences in methodologies and selection criteria. } US stocks dominate the holdings of the top 14 divided ETPs with an 82% share. } The top 25 stocks held by dividend ETPs make up 30% of total assets. } Stock concentration within industry sectors is relatively high, with the top five stocks making up 65% of energy holdings of dividend ETPs.
  3. 3. B LACK R OCK INVESTMENT INST I TUTE [ 3 ] Source: BlackRock. Data as of 15 July 2013. DEVELOPED matters Equity ETP Flows and Assets, Q2 vs. Q1 2013 EMERGING EMERGING DEVELOPED DEVELOPED Q12013 FLOWS Q22013 FLOWS 0 $70 BILLION10-10 20 30 40 50 60 $8 $116 $143 $92 $134 $65 $114 $859 $1,530bn TOTAL ASSETS EM E RGING DEVE LOPED Developed Markets: North America n Europe n Other n Global Ex-US n Global n Emerging Markets: Broad n Country n Regional n is INFLATION DEAD? Fixed Income ETP Flows and Assets, Q2 vs. Q1 2013 Q12013 FLOWS Q22013 FLOWS 0 10 $15 BILLION5-5 GOVERNMENTINFLATION HIGH YIELD $342bn TOTAL ASSETS $78 $73 $29 $36 $19 $42 $65 CORPORATE Source: BlackRock. Data as of 15 July 2013. Note: ‘Other’ includes categories such as government/corporate, mortgages, municipals and bank loans. Investment Grade n High Yield n Government n Other n Broad/Aggregate n Inflation n Emerging Market n Investors poured $56.4 billion into developed market equity ETPs–near record first-quarter levels. Funds focused on North American funds made up the bulk of inflows with a 59% share. Japan funds attracted a record quarterly $18 billion on expectations of monetary stimulus and structural reforms. The Bank of Japan lent a helping hand; it reported buying $3.6 billion of Japan ETPs in the second quarter under its asset purchase programme. Europe-focused funds attracted a scant $630 million. See the chart above. Investors yanked money from emerging market funds five straight months in a row. Expectations of a ‘tapering’ in the US Federal Reserve’s bond buying, slowing growth in China and fears of an emerging market funding crisis gave investors pause. Outflows totalled $12.2 billion. The lion’s share (around 92%) was from broad emerging market funds. Fixed income ETPs attracted $6.2 billion–the slowest rate since the fourth quarter of 2010. The ‘great rotation’ into equities has not arrived yet–but it is real within fixed income. Inflation-protected bond ETPs had record outflows of $3.4 billion as inflation fears subsided. US core consumer prices in June rose at the slowest pace in two years. High yield funds lost a record $2.1 billion and emerging market debt lost a record $1.2 billion. See the chart below. News the Fed could start to wind down its bond buying programme led to a stampede into short-term bonds, which are less vulnerable to rate rises than longer-dated securities. Flows into short maturity funds (three years and less) accelerated to a record $13.6 billion. Intermediate, long-term and broad maturity bond ETPs recorded outflows of $7.4 billion.
  4. 4. [ 4 ] D I V ID END D ELU G E PRECIOUS LOSSES Commodities ETP Flows and Assets, Q2 vs. Q1 2013 Q12013 FLOWS Q22013 FLOWS 0-5-10-15-20-25 $5 BILLION GOLD GOLD $126bn TOTAL ASSETS $11 $8 $5 $17 $5 $2 $79 Source: BlackRock. Data as of 15 July 2013. Gold n Broad Market n Silver n Energy n Agriculture n Other Precious Metals n Industrial Materials n NUMBER SHAREOFOVERALL 160 120 80 40 0 8% 6 4 2 0 2010 2011 2012 2013 Number of Dividend ETPs ■ Share of Overall Equity ETP Assets Source: BlackRock. Data as of 15 July 2013. us domination Global Dividend ETP Market Size and 2013 Flows US EUROPE DEVELOPED EMERGING TOTAL ASSETS(BN) Dividend $61 $3 $79 $8 $87 All Equity $822 $143 $1,293 $238 $1,530 Dividend Share 7.4% 2.3% 6.1% 3.4% 5.7% 2013FLOWS(BN) Dividend $9 $0.5 $13.6 $1.6 $15.2 All Equity $71 $0.7 $117 -$8 $109 Dividend Share 13% 62% 12% – 14% Gold funds saw six straight months of outflows, with a record $19.1 billion in the second quarter alone. The gold price tumbled 23% over the quarter as declining inflation expectations and the prospect of an end to quantitative easing sparked an investor exodus. Broad funds, silver and other commodities all recorded outflows. ETPs remain big players in gold markets. The industry’s assets totalled $78.6 billion at the end of June, equivalent to 66 million troy ounces of gold. That compares with global gold production of 87 million troy ounces in 2012, according to the US Geological Survey. Only the Fed, Germany’s Bundesbank, the International Monetary Fund (IMF), and the central banks of France and Italy hold more of the precious metal, according to Bloomberg and IMF data. Global dividend ETPs, which focus on dividend-paying equities, held a total of $87 billion at the quarter’s end. This equalled 5.7% of total equity ETP assets, compared with just 2.9% in 2010. See the chart on the bottom left. The number of dividend ETPs was 166 at the end of the second quarter–up 75% from 2010. This outpaced a 57% jump in fixed income ETPs and 37% overall industry growth. US-focused funds dominate, with around 70% of the dividend total–dwarfing Europe’s meager share of just 3.4%. Dividend ETPs have made up the bulk of the flows into European equity funds in 2013, although the totals are modest. See the table on the bottom right. Emerging markets are relatively small players in the dividend ETP world–but attracted net inflows in 2013 even as the overall category bled.
  5. 5. B LACK R OCK INVESTMENT INST I TUTE [ 5 ] BILLIONS YIELD 2010 2011 2012 2013 EmergingDeveloped 4% 3 2 1 0 -0.5 $4 3 2 1 0 -0.5 US 10-Year Treasury US Fiscal Cliff Jitters Sources: BlackRock and Thomson Reuters. Data as of 28 June 2013. bond alternatives Dividend ETP Flows and US 10-Year Bond Yields, 2010–2013 Source: BlackRock. Data as of 28 June 2013. prelude to summer blues? Monthly Dividend ETP Flows by Region, 2012–2013 7/12 8/12 9/12 10/12 11/12 12/12 1/13 2/13 3/13 4/13 5/13 6/13 ASSETS ($ MN) US Canada 1,099 727 369 632 -189 -562 1,889 619 2,071 2,718 1,677 476 64,336 Europe–Regional -15 25 4 -76 -24 21 65 87 7 21 39 52 1,655 Germany 26 0 15 -24 24 14 20 3 4 27 7 -5 641 Uk -3 -14 -31 16 15 22 61 18 3 12 10 19 951 Total Europe 8 11 -12 -85 15 57 147 108 14 59 56 66 3,247 Asia Pacific–Regional 7 40 8 84 110 -12 -48 22 48 47 25 -24 802 Australia 0 33 24 13 19 44 30 21 39 22 27 42 521 Japan 9 2 -8 13 25 15 -28 24 162 70 61 8 697 Asia Pacific Total 16 74 23 111 154 33 -46 67 250 140 114 48 2,082 Global Broad 31 41 71 149 61 106 145 155 147 163 1,367 97 3,745 Global Broad Ex Us 89 106 188 134 71 146 221 204 236 184 256 1 5,516 Developed Market Total 1,244 958 639 941 111 -220 2,355 1,152 2,717 3,264 3,471 688 78,926 Emerging Markets 137 226 285 242 181 159 574 389 262 163 209 -11 8,077 Total 1,381 1,184 923 1,183 292 -61 2,928 1,541 2,980 3,427 3,680 677 87,003 FIXED INCOME SUBSTITUTES Flows into dividend ETPs, which tend to be treated as bond substitutes by many investors, can be heavily influenced by government and monetary policies. The sector’s outflows in November and December of 2012 illustrate the point. Fears were growing about the US ‘fiscal cliff’–and the prospect of higher dividend taxes for wealthy US investors. See the table below and the chart on the right. The world (and dividend investors) survived the cliff. Inflows resumed in 2013 after a mild increase in dividend taxes for the wealthy. Net purchases slowed down again in June. The reason? Fed Chairman Ben Bernanke’s signal that the central bank may ‘taper’ its bond purchases led to a spike in interest rates. This triggered outflows from utilities, property equities, preferred stock and other crowded income plays. Dividend funds actually still managed net inflows of $677 million in June. Strong flows into dividend ETPs over the past three years have roughly tracked the decline in US Treasury yields to a record low of 1.44% in 2012. It is not a perfect relationship, but big yield declines typically were followed by increasing inflows. Similarly, backups in yields such as in the latter half of 2010, slowed flows (but did not kill them). See the chart on the right. Paltry bond yields have pushed investors into bond alternatives such as dividend ETPs. Bonds pay fixed coupons, but equities offer the prospect of rising dividend payments (as well as capital appreciation) as companies increase earnings–but with the risk of capital losses.
  6. 6. [ 6 ] D I V ID END D ELU G E BILLIONS 2010 2011 2012 2013 $3 2 1 0 -2 -1 US Cyclicals US Dividend mirror image? US ETP Flows: Dividend vs. Cyclicals, 2010–2013 Source: BlackRock. Data as of 28 June 2013. Notes: Cyclicals are US sector ETPs specialising in materials, consumer cyclicals, energy, industrials, technology and financials. The combined assets under management of this group stood at $101.5 billion on 28 June 28 2013, compared with $61 billion for US dividend ETPs. Data reflect 3-month averages. DIVIDENDYIELD ETP ASSETS (BILLION) 0 5 10 15 $20 0-1 1-2 2-2.5 2.5-3 3-3.5 3.5-4 4-5 5-6 6-7 7-8 8+% hunt for yield Global Dividend ETPs:Yield Distribution Sources: BlackRock and Bloomberg. Data as of 28 June 2013. Note: Based on 133 dividend ETPs with available data. BILLIONS 2010 2011 2012 2013 $4 3 2 1 0 -2 -1 Global Investment Grade Global Dividend Brothers in arms Global ETP Flows: Dividend vs. Investment Grade, 2010–2013 Source: BlackRock. Data as of 28 June 2013. Note: Assets under management of global investment grade bond ETPs stood at $78 billion on 28 June 2013, compared with $87 billion for global dividend ETPs. BONDIFICATION OF EQUITIES Money flows into dividend ETPs tend to move inversely with those into ETPs specialising in cyclical sectors such as materials, energy and financials. See the chart on the bottom left. Dividend stocks are regarded as defensives, and typically outperform cyclicals in periods of sluggish economic growth. Today, many defensive stocks (including dividend payers such as utilities) are at historic peaks in profitability and valuation. At these lofty levels, defensives may not provide the downside protection investors have come to expect (this year’s selloffs in utilities and property securities attest to this). We recommend slowly shifting out of crowded income plays and into cyclicals, as detailed in Exit, Entry and Overshoot of June 2013. Record low yields have led to the bondification of the equity market. Investors are buying quality companies with predictable earnings and dividend income. The result: flows into dividend ETPs are closely tracking flows into global investment grade (IG) bond funds. See the chart on the bottom right. Perhaps counterintuitively, flows into IG funds have been even more volatile than those into dividend funds. The sectors are similar in asset size, number of funds (121 IG bond funds versus 166 dividend funds) and geographical focus (US securities dominate). Dividend ETPs come in many flavours. The average dividend yield is 3.3% (weighted by assets under management), compared with 2.6% for the MSCI World Index and 2.1% for the SP 500. The averages mask significant variations. These stem from differing methodologies for selecting dividend stocks, benchmark indexes and regional focuses of funds. See the chart on the top right. Yields range from 2.1% to 6.6% in the 14 largest dividend ETPs globally (accounting for around 75% of assets).
  7. 7. B LACK R OCK INVESTMENT INST I TUTE [ 7 ] a portfolio staple Global Dividend ETPs: Sector and Country Holdings country share country share United States 82% Russia 1.4% Canada 2% China 1.4% Taiwan 1.7% Brazil 1.1% SEctORS ETP sector weights Over/ underweight vs. msci us Over/ underweight vs. msci world Staples 15.7% 6% 5% Industrials 14.6% 4% 4% Financials 13% -4% -8% Utilities 11.3% 8% 8% Energy 9.2% -1% -1% Discretionary 9.2% -4% -3% Materials 8.2% 5% 3% Healthcare 7.8% -5% -4% Technology 6.1% -12% -6% Telecoms 4.9% 2% 1% Sources: BlackRock, Thomson Reuters and MSCI. Data as of 28 June 2013. Note: Based on top 14 dividend ETPs, representing 75% of total dividend ETP assets. not (all) the usual suspects Global Dividend ETPs:Top 25 Holdings company Share Dividend ETPs Weight in SP 500 Dividend Yield 5-Year Dividend Growth Chevron 2.5% 1.6% 3.2% 9% Procter Gamble 2.1% 1.5% 3% 10% McDonald’s 2% 0.7% 3.1% 14% Exxon Mobil 1.9% 2.8% 2.7% 10% Coca-Cola 1.8% 1.2% 2.7% 8% PepsiCo 1.6% 0.9% 2.7% 8% Wal-Mart Stores 1.6% 1.7% 2.4% 13% ATT 1.5% 1.3% 5.1% 4% Abbott Laboratories 1.2% 0.4% 1.6% 5% Johnson Johnson 1.2% 1.7% 3% 8% 3M 1.1% 0.5% 2.2% 4% Emerson Electric 1% 0.3% 2.9% 8% United Technologies 1% 0.6% 2.2% 12% General Dynamics 0.9% 0.2% 2.8% 12% IBM 0.9% 1.4% 2% 17% Philip Morris 0.9% 1% 3.8% 15% Kimberly-Clark 0.9% 0.3% 3.3% 7% Microsoft 0.8% 2% 2.7% 15% Occidental Petroleum 0.8% 0.5% 2.9% 18% Medtronic 0.8% 0.4% 2.1% NA Pitney Bowes 0.8% 0% 5.3% 3% Lorillard 0.7% 0.1% 4.8% 28% Walgreen 0.7% 0.3% 2.4% 24% Lockheed Martin 0.7% 0.2% 4.2% 23% Pfizer 0.7% 1.4% 3.4% -5% TOTAL/AVERAGE 30.1% 23% 3.1% 11% Sources: BlackRock, Thomson Reuters and MSCI. Data as of 28 June 2013. Note: Based on top 14 dividend ETPs, representing 75% of total dividend ETP assets. Peek under the hood, and the composition of dividend ETPs looks quite different from broad equity indexes. Staples, industrials, financials and utilities are among the heaviest weighted sectors. The biggest differences with standard indexes are in technology and utilities holdings. See the chart above. Even these sector averages mask an incredible variety of weightings between different ETPs. For example, the weight of financials in the top 14 dividend ETPs varies from zero to 52.6%. Utilities exposure ranges from 1.2% to 30.4%. Why such huge variation between funds? The answer: there is no single benchmark. Some funds focus on companies that have a long history (think decades) of consistently increasing dividends. This rules out technology companies such as Microsoft (first dividend in 2003) or Apple (recently announced its first dividend since 1995). Other funds focus on higher-than-average dividend payers–while adding ‘smart rules’ to screen out companies likely to halt dividend payments in the near term. Others still concentrate on dividend stocks in certain market segments such as small caps–or regions such as emerging markets. The top 14 dividend ETPs hold more than 1,400 different equities. The top 25 companies held by dividend ETPs account for around 30% of total holdings. See the table on the bottom right. The top 50 stocks account for 44% of holdings, while the top 100 make up 62%. Stock concentration varies greatly across industry sectors. For example, the top five stocks in the utilities sector make up just 17.5% of total utilities holdings across dividend ETPs. The top five energy stocks, by contrast, make up 65% of that sector’s assets, thanks to the high weight of behemoth dividend payers such as Chevron and Exxon Mobil. This is a similar story to emerging market ETPs, where stock concentration tends to be high in many sectors. See Emerging Equity Exposed for details.
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