Lipper Equity Income and Loan Participation Funds See Record Weekly Inflows

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Weekly estimated net flows

Lipper Refinitiv

The big news on Thursday February 10 was the report from the Bureau of Labor Statistics showing that the consumer price index (CPI) for January rose more than expected for the month-over-month periods and the 12 last months.

The CPI jumped 0.6% from December and an incredible 7.5% from last January – marking the biggest annual spike in 40 years. The core CPI (excluding food and energy prices) rose 6.0% over the past year – the biggest increase since 1982.

Markets reacted bitterly to the news. The NASDAQ (-2.10%), S&P 500 (-1.81%) and DJIA (-1.47%) all fell on the day, while the VIX (+19.79%) and the 10-year Treasury yield (+5.29%) jumped.

The two-year Treasury yield rose to its highest amount since 2009. Although yields are still low by historical standards, the Federal Reserve’s tone continues to grow increasingly hawkish.

St. Louis Fed Chairman James Bullard, who is a Federal Open Markets Committee (FOMC) voter, upped the ante. He said his support for a half point hike in interest rates for the next meeting in March – 2000 was the last time a hike of this magnitude would occur.

Weekly estimated net flows

Lipper Refinitiv

Two Lipper classifications currently seeing record entries into this environment are Lipper Equity Income (EIEI) funds and Lipper Loan Participation (LP) funds.

We’ve talked a lot about scale, but it’s worth mentioning that Lipper Loan Participation Funds attracted an all-time weekly high in the last week of Lipper Fund Flows, attracting $2.3 billion.

Three of the largest weekly inflows on record have flowed into this classification over the past four weeks, leading to another record monthly inflow in January (+$10.4 billion).

Weekly estimated net flows

Lipper Refinitiv

The other Lipper classification to have had a record week was the Lipper Equity Income Funds. This classification invests in funds that seek relatively high current income and income growth by investing at least 65% of their portfolio in dividend-paying equity securities.

Over the past week, IEEI funds made inflows of $3.6 billion, breaking the previous record of over $1 billion. This ranking comes off their fourth highest total of monthly entries to date.

Three important elements of the current attractiveness of this classification are the allocation to the financial sector, the insurance sector and to income-producing securities.

For the most part, banks borrow money at a rate from the short end of the yield curve while lending money to borrowers at a rate from the long end of the yield curve .

This spread or net interest margin will increase and help increase profits. Insurance companies are a second beneficiary of rising long-term interest rates.

These companies collect premiums from their customers which are then invested by the insurance company. As rates rise, this “float” is invested in higher yielding bonds that offer a higher rate of return and ultimately increase the profits of the insurance company.

Finally, fixed-income investors looking for a steady stream of income will tend to flock to dividend-paying stocks as an alternative, as their yields are eaten away by rising rates.

Last week’s biggest attribute to massive EIEI inflows was Schwab US Dividend Equity ETF (SCHD, +$1.8 billion). As of December 31, 2021, the largest sector allocation for this ETF was financials (21.69%).

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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