Lipper Senior Research Analyst Don Cassidy on "Business for Breakfast" 1060 KRCN
Tuesday, March 29, 2005
Q. Don, the stock market has gone back into its choppy pattern of lastyear. ÊWhat are mutual funds investors doing with their money in thiscontext?A. You're right. ÊSo far this year we have had 3 pretty sharp trends: thefirst 3 weeks were a nasty decline, the next 6 weeks reached new recoveryhighs on some averages, and the past 3+ weeks have been painful again.
Q. Doesn't that kind of erratic behavior confuse investors and drive themto slow down on funds decisions?
A. Yes, I believe it does. What no one except traders likes is volatility.We'd prefer smooth markets, if only we could get them to cooperate.
Q. So, what do you Lipper folks see in terms of where funds investors havebeen putting their money?
A.
- Overall, I'd say that investors have shown a dual personality, asthey did during 2004 too.
- Caution still is a big driver.
- But strong performance is also attracting money in scatteredlittle pockets.
- Overall, net flow of money closely parallels recent marketmovement.
Q. We'd better take those one at a time. How about starting with that lastone?
A. ÊInvestors are human beings and taken as a group their actions arerepeating and predictable. ÊWhat is vivid (good or bad) induces action.The bad news is that people always move towards comfort and away fromdiscomfort. ÊThis means they buy stocks and funds while or AFTER they havebeen strong -- and sell them while or after they have been weak.
Q. A perfect formula for buy high, sell lower!
A. Definitely. 180 degrees opposite profitable, but very emotionallycomfortable and undisciplined. ÊWe see it in the total numbers and also inthe types of funds people plow their money in and out of.
Q. I guess your observation about investors having a dual personalitycaptures both "caution" but at the same time "chasing performance??
A. ÊAnd it is probably not the same people doing both. ÊFlows in and out offunds are what happen on the margin -- among people who choose to take anyaction at all (plus automatic-pilot type flows in workplace retirementplans like 401(k)s). ÊBut flows reveal the collective mood of investors tothe degree that what they are feeling and thinking DOES prompt them toactually take action.
Q. Let's talk about places where strong performance is driving positive netflows of money into the strong types of funds...
A. Sure. ÊValue has been beating growth style for 5 years and flows arestrongly reflecting this. ÊIn February, a pretty strong flows month becausethe overall market was strong, growth funds saw almost $1 billion flow out,while value funds saw almost $6 billion go in, net. ÊFor all 2004, valuefunds took in about $55 billion while growth funds saw $15 billion drainout. ÊIn an UP market! ÊAnd we see it in sectors and worldwide too.
Q. Examples?
A. The dollar is weak again, and in February nearly $12 billion went intoworld equity funds while only $8.5 billion went into domestic stock funds.That is a striking comparison since many people are not familiar withoverseas investing and usually tend to avoid it.
Q. How about sectors? Oil and gas has been VERY strong lately...
A. Right, and the flows into natural resources funds are reflecting notonly oil prices but also a wide range of commodities that are rising(timber, iron, copper, etc).
Q. People betting on inflation?
A. Probably. ÊBut at least going where the obvious action is. ÊAt the endof 2003, natural resources funds had just $7.8 billion of total assets.Their inflows were $4.65 billion in 2004. ÊAnd in the first 2 months ofthis year, another $2.6 billion! ÊFlows in February (a record $2.1 billionin) were more than 11.5% of assets at the end of January.
Q. Is that kind of percentage high?
A. Yes, it is pretty well up there. ÊIn November 1999, technology fundstook in 11.2% of existing money in one month. So it looks a little urgentthat people want "in." ÊAt least the natural resources funds have stockswith real assets and earnings and dividends. ÊTechnology was talking abouteyeball counts and clicks, remember?
Q. ÊHow about turning to the cautious areas of the market? What do you seethere?
A. ÊA pattern quite like what we saw in 2003-04. ÊValue funds are popularand the net flows show it. They are also performing better than growth.Dividends are a big attraction. ÊReal estate funds, down a bit so far in2005, have been big winners for 5 years and they took in another quarterbillion $ last month. ÊThey pay nice tasty dividends. ÊUtility funds tookin about $100 million, and they of course pay nice income too. ÊBalancedfunds (a mix of stocks and bonds in one package) took in $3.2 billion;Income funds $3.3 billion; and Equity Income added $1.8 billion. ÊThecaution and the demand for current income in hand are very real!
Q. Speaking of income, what about bond funds' flows?
A. Again, income talks! ÊNet inflows of about $3.7 billion in Februarydespite rising rates and expectations of more rising rates. ÊWorld income(dollar play) took in $1.5 billion of that, and TIPS funds added$900million. ÊPeople put money into corporate-bond funds and took it out oftreasury funds: Yield grabbing, or rising confidence in the expansion? ÊSohere again, in bond funds, we see very selective patterns rather thanacross-the-board net buying.
Q. So people are really focused on income?
A. Definitely.
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Don Cassidy is a Senior Research Analyst at Lipper specializing in fund flows, exchange-traded funds, (ETFs), closed-end funds, equity fund performance, and author of Trading on Volume (McGraw-HIll).
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