FUND FLOWS - October 2013
Persistence vs. Speculation Fund flows provide two very different types of insights. Traditional mutual fund flows provide us with a window into more persistent trends coming from longer-term investors. In contrast, ETFs—often used as trading vehicles—give us an indication of sentiment shifts among professional traders. This is especially helpful in identifying changes in investor attitudes at the sector level.
Re-Risking Portfolios There has been an enormous shift in the allocation of funds since the market’s 2009 trough. Interestingly, both stocks and bonds have experienced inflows. The greatest loser over this time has been low-yielding money funds. The largest relative growth rates have occurred in international stocks and balanced funds. Market Neutral funds have experienced tremendous investor interest over the past several years.
Move into Stocks, Not Simply Out of Bonds Since early 2013, fund investors have flocked to equities. Many attribute this move to rising rates. A look at relative flows shows that the move into stocks occurred roughly four months earlier than the move out of bonds. This is positive for stocks for two reasons: (1) it signals greater conviction in stocks by the investing public; and (2) it would indicate that flows into stocks should hold up despite the recent decline in Treasury yields.
ETF and Mutual Fund Investors Differ on Sector Outlook Over the past month and quarter, traditional mutual fund and ETF investors have differed significantly in their sector views. More specifically, ETF investors have increased their exposure to Tech and Health Care at the expense of Energy. In contrast, mutual fund investors have rotated toward Energy and Financials. Both groups have shunned more interest rate sensitive groups such as Utilities and REITs.