Fund Flow

While flows into the largest mutual fund category by assets have petered out in recent months, a number of impressive fund flow trends quietly remain intact.

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In this report we take an in-depth look at the evolution of the industry, particularly the U.S. mutual fund industry, to help understand how some fund flow trends are more of an indication of evolving investor preferences instead of an indication of retail investor sentiment toward a particular asset class.

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The late 1970’s bull market has some eerie similarities, and sentiment reflects Main Street’s newfound bullishness. Plus a look at January fund category flows gives us some points to ponder.

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We are in clear view of the “Twin Peaks” S&P 500 highs of the last decade and these should be eclipsed by mid-year. But when the S&P 500 is adjusted for inflation or denominated in Swiss Francs or Gold these highs may prove elusive.

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Despite flows out of U.S. focus equity mutual funds, investors remain heavily invested there; while dollars flood into bond funds, they’re also flowing into other varieties of equity funds.

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U.S. focused equity mutual funds see continued net outflows. A look back at mutual fund flows during past bull markets answers whether public participation is required to reach new stock market highs….And does a bigger Bear market equate to a bigger Bull market recovery?

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Mutual fund outflow played significant role in Major Trend deterioration. There have been about 6 1/2 months where the four week average has shown net inflow to U.S. equity funds, but outflow is now accelerating as three of last four weeks have seen net outflow.

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Jun Zhu examines the use of Emerging Market Mutual Fund Flow as a sentiment indicator. It works best as a buy signal, but is not bad as a sell signal. Currently neither on a buy or sell.

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This month’s “Of Special Interest” takes a look back at and updates some our favorite charts from 2010.

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The relationship between equity mutual fund cash flow and performance of the equity markets can be reduced to two basic “golden rules” of interpretation.

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Taxes are slated to go up as Bush tax cuts expire. History shows that selling increases in anticipation of higher capital gains taxes. Stock performance also does better in anticipation of lower tax environments than higher.

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When you are all doing the same thing at the same time, it’s usually a good time to question if the investment makes sense anymore.

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In 2009, Main Street investors continued to pull money out of U.S. focus equity mutual funds. There were  some equity funds that they did embrace…specifically Emerging Country funds.

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Get out in front of the lemmings. We expect to ultimately see bond funds reverse now that performance has been lagging the stock market. But where will the money go? Our best guess is that it flows to Emerging Country Equities….once again chasing strong performance.

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This month’s “Of Special Interest” section looks at six trends from the Supply/Demand front. Key to several of these trends is that investors chase performance: still seeing big inflows into bond funds, with big outflows from retail money market funds.

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Starting to see some modest inflow into U.S. focus equity mutual funds, which is a stock market positive.

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There was $84 billion coming out of U.S. stock and bond funds in October, the highest net redemptions ever. Second highest month of outflow came in September 2008 (just a month earlier). To us, this looks like a case of capitulation by the public.

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September was a horrible month for the stock market, but now is not the time to be selling stocks. We believe a market bottom is close at hand, and this month’s “Inside The Stock Market” section presents several of our “big picture”, historical market studies to provide support for this belief.

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Demoralizing long term returns factor into why the investing public has avoided the U.S. stock market during the last several years — even during the bull market.

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