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Last Week: Largest Equity Mutual Fund Outflow ... in history
Reply to @hank: Absolutely, the fund managers always love money flowing in when facing redemptions so they don't have to sell anything in their portfolio to meet redemptions when it is trending down and thus have their performance destroyed. This is true regardless of whether the money is flowing in wisely or foolishly.
As I wrote back in December in the context of large flow out of bond funds:
Expected performance chasing from retail investors will pour more of that money into domestic stocks than other sectors that have been lagging just in time for a large correction to occur in US equities after most of that money has come in. Smart money is already leaving US stocks. Lipper is reporting more than $6.5B outflow from US equity funds this week!
The correction in US equities will start a flight to safety to fixed income which will make bonds go up just after most people have left it and they will start to come back after it has risen close to it's top.
Think I have seen this movie again and again.
Some of yesterday's performance chasers are today's contrarians and not because of any conscious strategy to be contrarian.
So what is the best interpretation of these record outflows? Should we think of them as evidence of unsophisticated, "weak handed" pseudo-investors who panic easily and create the wall-of-worry that stock prices love to climb? Or would one better think of the outflows as evidence that stock prices have gotten ahead of themselves -- a not so subtle hint of the immediate future downward pressure on stock prices?
Reply to @dryflower: The best interpretation of these inflows/outflows, in my opinion, is market noise to be ignored and not used for any investment decisions.
For people that exploit trends or TA, the optimal sell/buy decisions are made much before this kind of news appears and so useless. Passive investors shouldn't care anyway.
In reality, large investors that use TA are likely behind a lot of such rotational movements especially with index ETFs. They go first. The retail investors who panic follow much later. It has no predictive value since the exodus can last for a day or a month or a year with many.bounce backs.
Reply to @dryflower: I take it - to some degree - as a look at investor mentality. People used to hold stocks for years, the average holding time is now days. Over the last few years, any volatility has been met with selling. You have many people not taking a long-term - or even medium-term - mentality when it comes to investing.
Reply to @hank: " What feeds these "stampedes" in and than back out by the larger investing public? I have no idea."
Continued psychological effect of 2008? Possibly the desire to participate in rising asset markets but not the confidence to stick around when things get volatile because they're not seeing the same level of improvement in the world around them?
A lot of these flow changes are not caused by retail investors. Firms like Good Harbor Financial trade billions of dollars every month and they sold equities and bought bonds last week. There are also a whole bunch of momentum-based strategy ETFs now that have attracted assets in the billions.
Reply to @MOZART325: That's an interesting comment. ... Maybe Ted could dig up something on the extent which traders and/or institutional investors move the equity markets over shorter periods like the one Scott's posted article referenced? That may be hard to sort-out because I believe mutual funds are considered "institutional" - yet in large measure need to react to their retail investors' wants and needs.
A step further ... Do large hedge funds and other players intentionally engage in (temporary) heavy selling designed to shake-out weaker hands in various markets? I'm skeptical it would work very well in the broader equity arena - but it seems entirely possible in gold and other narrower markets.
Our house does monitor etf pricing in select areas; as we feel this is a quick and dirty look at some hot monies. Below is just one look into hedge fund uses of etfs. Also, to note; is the use or available use of options on top of etf's (second link).
I have not looked at this for some time now; but here are a few views regarding potential money flows related to etf's:
IMO, one should consider that hot money flows from many sources into and out of etf's can place noteable price swings. This does begin to consider whatever the algo machines are doing otherwise, from the big money centers around the globe.
Comments
As I wrote back in December in the context of large flow out of bond funds: Some of yesterday's performance chasers are today's contrarians and not because of any conscious strategy to be contrarian.
http://www.mutualfundobserver.com/discussions-3/#/discussion/11105/john-bogle-retirement-investors-leave-80-on-the-table
For people that exploit trends or TA, the optimal sell/buy decisions are made much before this kind of news appears and so useless. Passive investors shouldn't care anyway.
In reality, large investors that use TA are likely behind a lot of such rotational movements especially with index ETFs. They go first. The retail investors who panic follow much later. It has no predictive value since the exodus can last for a day or a month or a year with many.bounce backs.
Continued psychological effect of 2008? Possibly the desire to participate in rising asset markets but not the confidence to stick around when things get volatile because they're not seeing the same level of improvement in the world around them?
A step further ... Do large hedge funds and other players intentionally engage in (temporary) heavy selling designed to shake-out weaker hands in various markets? I'm skeptical it would work very well in the broader equity arena - but it seems entirely possible in gold and other narrower markets.
Our house does monitor etf pricing in select areas; as we feel this is a quick and dirty look at some hot monies. Below is just one look into hedge fund uses of etfs. Also, to note; is the use or available use of options on top of etf's (second link).
I have not looked at this for some time now; but here are a few views regarding potential money flows related to etf's:
Bridgewater etf holdings
options and the etf "VWO"
IMO, one should consider that hot money flows from many sources into and out of etf's can place noteable price swings. This does begin to consider whatever the algo machines are doing otherwise, from the big money centers around the globe.
Take care,
Catch