U.S. Equity Funds Suffering Extended Run of Outflows

Investors pulled $2.6 billion from U.S. stock funds for the 10th week in a row, according to a recent Bloomberg article (based on data as of August 23rd outlined in a Bank of America Merrill Lynch research paper). In fact, U.S. equity funds have suffered their longest exodus in 13 years. “The outflows are yet more evidence traders are shunning the U.S. in favor of better growth prospects and more stable politics elsewhere,” the article says. Increasing doubt around the likelihood of policy change in Washington has exacerbated the trend, the article argues, turning attention and favor toward European equities. […]

Bull Market Can Be Bolstered by Retirement Account Inflow

According to a new book by an MIT economist argues that the efficient market hypothesis is “incomplete and inadequate” when it comes to valuations, says an article appearing last month in Barron’s. In his book, titled Adaptive Market, Financial Evolution at the Speed of Thought, behavioral finance authority Andrew Lo argues that market forces other than investor buying and selling behavior (based on corporate earnings profits) — such as increased demand from retirement funds– can drive stock valuations over the long term. “Over the long run,” says Lo in a recent interview with MarketWatch, “markets are looking pretty good, because […]

Biggest Small Cap Outflow in a Decade

Small-caps have seen the biggest outflow in 10 years, according to a recent Bloomberg article. The article says that after being “spooked by the steepest selloff in the domestically focused stocks” since the election, last week investors pulled $3.5 billion from the biggest ETF that tracks the Russell 2000 Index. It adds, “The biggest outflow in 10 years comes less than a month after small caps roared to an all-time high on speculation Trump administration policies would supercharge growth in the world’s largest economy.” The small-cap index, the article says, is less liquid than the S&P 500 and more reactive […]

Morningstar: Funds Flow and Liquidity Affect Performance

Two factors that can affect a fund’s performance are the level of fund inflows and the trading impact of that inflow, explains Morningstar’s Russel Kinnel in a recent article. For most funds, writes Kinnel, “the ideal level of money coming in is a small positive inflow. It gives the managers some money to pursue new ideas with but doesn’t force them into significant selling or buying.” Kinnel points out that a large inflow can be problematic because it can be very time consuming for the fund manager and/or can incur high trading costs. Kinnel explains that the “bloat ratio” –which […]

Active Fund Performance Improved in Recent Months

Morningstar data shows that, in February, actively managed mutual funds posted their first month of positive net inflows since April 2015, according to an article in The Wall Street Journal. There is optimism among investors, the article says, that “conditions are right for active managers’ resurgence to continue, eventually slowing the flow of money out of actively managed funds into lower-cost index-tracking funds, a trend that hounded many of them in recent years.” While investors continue to withdraw money from actively managed funds, says WSJ, they pulled out less in February than in any month since September 2015. The last […]

How Will Increasing Passive Investment Affect Market Efficiency?

Writing for Bloomberg View, Stony Brook professor Noah Smith asks, “As passive [investing] takes over more and more of the asset-management universe, will the market become more efficient or less?” To get there, he begins by noting the “stunning” and ongoing “shift from active to passive investment management” may be “the biggest story in the finance industry during the past decade.” The graph below illustrates the change. He suggests that the development may result in part from “the power of the idea itself,” which connects with the efficient markets hypothesis for which Eugene Fama won a Nobel Prize in 2013, […]

Why The “Great Rotation” May Not Be As Bullish As You Think

The “Great Rotation” — the expected move that investors will, at some point, make from bonds to back to equities — has been used as a reason to be bullish on stocks. But Mark Hulbert says that reasoning may be flawed. “I suppose it is conceivable. But a careful review of historical fund patterns doesn’t provide much support for this so-called Great Rotation argument,” Hulbert writes for MarketWatch. He says that at the end of 2012, the percentage of mutual fund assets allocated by investors to stocks was 65.7% — not a whole lot less than the 71% average since […]

Zweig: Fund Flow Lessons Are Complicated

About $66 billion has flowed into stock funds and exchange-traded funds this year, leading some to say that it’s a contrarian sign to sell stocks. But on The Wall Street Journal’s Total Return blog, Jason Zweig says it’s more complicated than that. “After all, $66 billion is less than 1% of total assets at stock funds and ETFs,” writes Zweig. “A 1% shift in one month is interesting, and it could turn out to be the beginning of a significant trend. But moves on that scale are hardly unusual. It’s one month’s data, and it’s a blip. Even ‘blip’ might […]