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Mutual Funds Flows: An Overview on Reading it


Release Date: fourth week of every month
(For Mutual Funds Flow report)

Mutual Funds Flows are data that are the fruits of research and data-gathering by the non-profit Investment Company Institute (ICI). These reports represent a Herculean amount of work as ICI collects reams of information about an estimated 8200 stock funds, bond funds, money market funds, ETFs, and closed-end funds, among other funds.

The company puts out two basic kinds of funds flows reports: The “Estimated Long Term Mutual Fund Flows,” and “Weekly Money Market Fund Assets.” The former is released during the fourth week of every month and the latter is released weekly.

Following are some of the salient figures from the Long Term Mutual Funds Flows report released on June 17th, 2015. All figures are given in billions of U.S. dollars per month.

Type of Fund

May Fund Flows

April Fund Flows

All Equity Funds

3.3b

6.9b

All Bond Funds

14.6b

12.7b

International Equity

11.8b

18.2b

U.S. Equity

-14.2

-18.1b


Although the above table contains only a tiny fraction of the data published by the ICI, this is probably among the most important data. It shows that in April and May more than $32 billion left U.S. equity mutual funds and about $30 billion entered international equity mutual funds.

At the same time, about $27 billion entered bond funds. Without a doubt, much of this reallocation came because mutual fund investors feared that there was limited further upside in U.S. equities because of high valuations, mediocre economic data, and fears the Fed might raise rates.

On the other hand, valuations overseas, especially in Europe, as well as a history of these international equities indices reverting to the mean, have lead many fund investors to allocate equities internationally. Similar fears have lead investors into bond funds.

Several observers have noted that this trend of equities outflows had started several months earlier and that, strangely, despite ever waning mutual fund flows, American equity indices continued higher.

This is rare, though not unheard of. Usually, the correlation between mutual fund inflows and the S&P 500 has been much closer. Mutual Fund Flow data, of course does not follow the buying and selling of ALL equity investors. There are many individual and institutional equity investors who conduct business without the help of mutual funds, although an estimated 11% of mutual fund holdings are held by institutions.

The fact remains, though, that most investors invest in mutual funds. ICI estimates that investors held $15.9 trillion in mutual fund assets at the end of 2014. So it seems that the market continued higher because institutions and individual stockholders (perhaps many of them foreign), saw brighter prospects for U.S. equities than did mutual fund investors.

Until recently, sophisticated investors and analysts assumed that the strong buying pressure of mutual fund investors was a contrary indicator. This was the “retail” investor whose entry in the market could be counted on to mark a top. Occasionally, this still happens.

For instance, mutual fund investors piled into U.S. bond funds in 2012 and Q1 2013 just as the bull market was coming to an end. Since the last recession, though, mutual fund investors seem in general to have become much savvier. As CNBC commentator as Brown put it, “Mutual Fund Flows are not a contrarian indicator. Mutual fund investors have done fantastically at timing markets.” (CNBC, 2/23/12) So, in general, following mutual fund flows is great for keeping one’s thumb on the pulse of the market, but not an effective way of generating conventional contrary indicators.

There are, however, ways of using fund flow data to generate solid ideas for investing and trading. ICI keeps track of how much cash the mutual fund companies are holding. Small amounts of cash on hand are of course bearish. Very large amounts or increases of funds in money market accounts often mean that investors and financial companies like insurance companies and pension funds might soon convert that money into stocks or bonds.

Large cash holdings by these financial companies is often bullish. Data about consumer debt, savings rates, and home equity resources can often offer clues about imminent securities purchases by individual investors.

It also should be noted that both Lipper and Trim Tabs present mutual fund flows data in a way that is often more colorful, thematic, and easier to digest.

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