Mutual Fund Money Flows

Today's chart comes from Marketwatch.com who derive their chart date courtesy of Bigcharts.com. It is the best I could come up with showing historic yields on the 2-year treasury going back to the late 70's.

Back in the late 70's and early 80's bond yields spiked to levels above 16% as fears of runaway inflation were rampant. The Reagan Administration with the help of Federal Reserve Chairman Paul Volcker chained inflation to manageable levels, interest rates started coming down and the stock market began in the early 80's a nearly 20 year rally.

Interest rates on the 2-year treasury are currently under 2%. They really have no room to go lower and last week's action by the Federal Reserve to raise the discount rate signals that rates at some point in the future will start to trend higher.

So what are investors doing with their money?

According to investor data that follows mutual fund money flows, funds continue to leave the stock market in favor of bond funds. Now I own certain bond & preferred ETFs for certain strategic reasons. But this mindless flow of capital into bond funds strikes me as another example of how the public is often wrong in how they invest their money. It is also a lesson why most individuals need help investing their assets but that is the subject for another post at another time.

Here's an excerpt from David Berman over at Seeking Alpha.com on the subject.

Dumb Money: What Mutual Fund Flows Say About Investment Trends: David Berman.

The next time you try to make a well-timed move into, or out of, a mutual fund, keep in mind that academics have a term for people like us: dumb money. That’s because evidence suggests that little investors like us have a tendency to get wrapped up in the news, pulling the plug on equities when the stock market has already bottomed out and jumping into stocks when they are near a peak, dooming ourselves to poor returns. But that’s why strategists remain interested in mutual fund flows – and what’s interesting is that, despite all the fretting over the steep rebound in the stock market over the past year, fund flows suggest that mutual fund investors remain in defensive mode, preferring bonds over stocks....

...{I}n...{t}he United States, {the}...Investment Company Institute reported last week that long-term mutual funds recorded their 47th straight week of net inflows in the first week of February – but bond funds enjoyed the biggest gains, while equity funds suffered net outflows of cash. This conforms to 2009 trends as well, suggesting that investors who were burned during the terrible stock market downturn of 2008 and early 2009 remain wary about joining this bull market....

The two largest inflows into equity mutual funds occurred in the fall of 1987 on the eve of a market crash and the first quarter of 2000 while the inklings of the first bear market of the 2000's began to stir. Two of the largest outflows from equity mutual funds came just prior to both of the Gulf Wars in January 1991 and March 2003 on the cusp of two great bull market rallies. Study after study shows further examples of how the mass psychosis of the public is often wrong when it comes to investing.

There may be good strategic reasons for investors to put some of their assets into fixed income securities at this time. Indeed investors looking for a more balanced approach to their portfolios will be invested in bonds at any given time. They however will do so likely with a laddered approach that attempts to take advantage of the yield curve.

But this mindless drive by investors to still scramble for yield will likely end poorly as I think stocks should out perform bonds substantially over the next decade. Time will tell but it often pays to lean against the public when they make such a substantive bet with their assets.

Link: Dumb-money!

*Long certain bond ETFs and preferred ETFs in portfolios seeking more of a balanced approach to their assets.