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January 21, 2013

Equity Mutual Fund Inflows – Less Than Meets the Eye


One or two data points don’t make a trend, especially under the possible influence of seasonal portfolio rebalancing.  While some media have reported “whopping weekly inflows” into stock funds in early January, evidence of a sustained trend is yet to be seen.   A closer look at the data seems to point to a more cautious view on equities in general, based on timing and other factors.  Also, a continuing move into international equity funds has come mainly at the expense of large cap domestic equity funds.


Early 2013 Equity Flows

In the first 2013 report of investor money movements, Lipper Fund Flows shows that $18.3 billion moved into equity mutual funds for the week ending January 9 – $10.78 billion in ETFs, and $7.53 billion in stock mutual funds.  Another $3.76 billion moved into stock mutual funds for the week ending January 16, making it the largest two-week increase in that category since April 2000, according to Lipper analyst Matthew Lemieux.  Those with a sense of market history will recall that March 2000 marked the all-time high for the S&P 500 index, and the timing of inflows that year could not have been much worse.


Moreover, the recent jump in equity funds excluding ETFs barely begins to repair the damage done over the past three calendar years, as can be seen from the table below.


20130121 Lipper


Starting in March 2011, equity mutual funds have incurred 22 straight months of net dollar outflows, according to Tom Roseen, Lipper’s Head of Research Services.  A positive January would end that streak, but more on that later.


Monies exiting equity mutual funds for the three years ending 2012 is most concentrated in Large Cap Growth and Value funds, which have declined at the expense of International Equity mutual funds as well as Equity ETFs in general.


The table shows positive money flows in 2010 for ETF Only ($67.7 billion) and Mutual Funds ($6.5 billion) categories.  But while the S&P 500 index ended 2010 advancing 12.7% in price, Large Cap Growth and Value mutual funds experienced a $42.4 billion loss.  Excluding the U.S., the rest of the world saw a lesser increase of 9.4%, if one uses the Vanguard FTSE All-World ex-US ETF (VEU.N) as a proxy for markets outside of the U.S.  Apparently investors weren’t chasing performance as much as possibly making fundamental realignments to their investment strategies.


Then for 2011, in spite of a flat S&P 500 performance, Large Cap Growth and Value funds bled another $102.8 billion, while International Equity funds took in another $15.7 billion even as their markets dropped by about 17% (again using the VEU as a proxy).


With market returns for 2012 in the books and the S&P 500 up 13.4% in price for the year, Large Cap Growth and Value funds lost another $84.2 billion of investor monies.  The international VEU ETF performed slightly better in price with a 15.3% gain as International Equity mutual funds took in an additional $20.0 billion.


2013 Year-To-Date Trends

Returning to the potential of the 22-month negative money flow streak among equity mutual funds ending, month-to-date data points to that possibility.  That’s not necessarily good news for the market, for a few reasons.


First, the high level of two-week April 2000 inflows came a month after the all-time high on the S&P 500 (1553.11) in March of that year – not exactly a smart money move.  Second, of the $11.3 billion year-to-date flowing into equity mutual funds, international funds claim $5.56 billion or almost half of that total figure.  Third, the exodus of Large Cap Growth and Value funds has temporarily reversed in a modest manner, with a two-week total inflow of $2.76 billion.



A few caveats are in order to temper the enthusiastic press response to early 2013 money flow results.  First, while investors watch where the so-called smart money is heading, individual mutual fund flow trends have not historically earned that title.  In fact, the retail crowd has often jumped onto certain trends at precisely the wrong time, including the technology stock run-up to the March 2000 market highs.  Second, annual and quarterly rebalancing activities may distort what appear to be secular trends, such as the earlier-mentioned 2010-2012 exodus from equity Large Cap Growth and Value, which may resume in the coming weeks.   Finally, there is historic evidence of the trend from active to passive investment management continuing, though ETFs are as much a trader’s vehicle as they are an investor’s solution.  This makes reading the tea leaves of ETF fund flows more challenging due to the potential to fluctuate more than mutual fund flows.


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