ebook essays pieces of the puzzle
Friday, August 5th, 2011
no buyers

Talk about an important chart.  It shows the net cash flow into equity funds as reported by the Investment Company Institute.

The bars in the top panel represent the monthly flows and the line is the total for the preceding twelve months.  When comparing that image to the return on the S&P 500 in the bottom panel (this is a monthly chart; the dot shows the return through 8/4), you can see the strong relationship between performance and flows.

What’s also evident is the fact that buyers came back relatively quickly after the dot-com and 9/11 double whammy.  That has not been the case in the wake of the financial crisis, despite a hardy market rebound.  The only time that yearly flows have been positive during that time was just before the Flash Crash.  Whether that event had anything to do with it or not, the outflows began anew thereafter.  The mutual fund numbers are through June; the weekly updates from ICI (and the recent drop in the market) tell you that more red figures are on their way.

There’s a lot to say about this.  Clearly, the ETF juggernaut is clobbering traditional mutual funds, changing the business and also the reliability of these flows as an indicator.  There’s also a demographic factor, with baby boomers loving risk (and positive returns) in the 1990s when retirement seemed a ways off, but they are understandably more cautious now.

Another caveat is that these are aggregate numbers for equity funds.  Some sub-categories (those in foreign markets or small and mid cap stocks) have done relatively well since 2000 and, as you would expect, are getting positive cash flows.  While I don’t have access to the historical numbers for the finer slices of the data, by inference you can tell that there’s an ongoing bloodbath in the big funds that invest in S&P-like names (where a large percentage of the money is).

All of that having been said, when there are no buyers, what does it mean for the mutual fund companies and for the market?  (Chart:  Bloomberg terminal.)

of states and styles

A cool map I found online got me considering mental images of states and styles.  So, I wrote a posting that includes a piece of that map for reference, a reflection on a seminal book from thirty years ago, and, most importantly, how they relate to the challenges of describing an investment style.  Good reading for asset managers and those who buy their services.