Lipper Research Analyst Don Cassidy on "Business for Breakfast" 1060 KRCN - Flows Slowed a Lot in May
Q. Don, about this time of month you folks at Lipper usually havefigured out the recent net money flows into mutual funds...A. Right. And the numbers for May were way down from those of priormonths.
Q. That's usually the way it is, isn't it, when the market takes adramatic dive?
A. Definitely. People seem to invest from their comfort zones more thanfrom logic.
Q. And you mean by that?
A. Well, in 20/20 hindsight we can all look at the extremes on ahistorical chart and say "that was a great time to sell, or to buy"--but inreal time our emotions seem to steer us to buy high when the market ishappy and sell low and fail to buy when it is down and skittish.
Q. So, this happened again in May?
A. Just like clockwork.
Q. So okay, how sharp was the drop-off in net flows?
A. For May Lipper estimates stock or equity funds took in about $10.5billion more in new purchases than they paid out in redemptions. Thatcompares with a little more than $30 billion per month on average inthe four earlier months of 2006, so about a two-thirds drop.
Q. And basically, all triggered by the market's starting to sell offaround May 10?
A. Right. If we had been down for the whole month instead of up thefirst ten days, the numbers would have been even smaller.
Q. What kinds of flows did you see in bond funds and in money marketfunds?
A. Bond funds had about $1.1 billion run off net, which is notsurprising since there has been so much talk about rising rates. There werejust a few pockets of strong flows (like short-intermediate bondfunds, world bonds, and TIPS) but the main trend was net small redemptions.Weakness in stocks probably helped keep the number small.
Q. And money funds?
A. They got a real boost from the redemptions in stock funds and fromthe selling of individual stocks. We saw about $46 billion of net inflowsinto money funds for May.
Q. How does that compare with recent history?
A. It was the strongest single month since November 2002, right afterthe stock market's bottom. And it compared with recent annual averages forMay of about $8 billion or $9 billion per year.
Q. Of course, the new higher interest rates available didn't hurt moneyfunds at all, I bet.
A. I think you're totally correct about that! And that factor may alsobe hurting stocks and stock fund flows. If people are at all nervous, theyretreat to the comfort of current income. And 5% in money funds or CDsnow is a lot more appealing than 1% a couple of years back!
Q. Back to the stock funds. You had a plus of $10 billion. Where was thestrength?
A. Mainly in only two places:
- World equity funds +$7.6 billion
- LifeCycle/Style funds +$4.5 billion--those two together were more than the industry's overall net!
- S&P 500 funds -$1.8 billion
- Sector funds -$2.8 billion
- US diversified equity funds +$2.9 billion
Q. Sector funds--should we suppose that money started flowing out of thegold and resources funds?
A. Gold funds did have a small outflow. But the natural resources fundshad a steadier, less-speculative set of fans, and the funds still had about$300 million net come in. But that was far below their $1.7 billion ofApril. All other kinds of sector portfolios, even including real estate orREIT funds, had net outflows.
Q. Real estate, too?
A. Right. You might think with the high dividends REITs pay, the flowswould have been steadier. But to a certain degree there was a mentality outthere of "if I have a profit I'm going to nail it down." REIT funds areup six and a half years running, the longest streak of all fund types.
Q. Right. So that accounts for how the stock groups with the biggestrecent gains took the sharpest hits!
A. Exactly.
Q. Interesting to see that the S&P 500 Index funds had a net outflow...aren't those people supposedly the faithful long-term holders?
A. True. But large-cap has been lagging small-cap for so long that theS&P types have had a dribble of outflows for some time--probably bored orimpatient money from 1999 and early 2000 that still has not gotten quiteeven. Large-cap funds themselves had about $6.7 billion of net outflows inMay!
Q. Can you put that $10.5 billion into some context?
A. Sure. The best estimates we have seen show that net flows into stockfunds in 401(k) plans are about $105 billion a year, or maybe $8 billion or$9 billion a month. So, if that is your base--sort of coming in onautomatic pilot--a figure of $10.5 billion net means that current decisionswere just about a zero net wash.
Q. What do you make of all this? What's the outlook now?
A. Flows, especially of stock funds, tend to correlate strongly withcurrent and recent past performance. I think people now are very sensitiveto letting paper profits get away, after what they rememberhappened to them when they felt so great in 2000-2002. So, I'd expectJune's flows will be smaller than May's, unless we get a whopper of a rallyhere in the next ten days. June could actually go negative for thewhole month, if the next ten days should get nasty again.
Q. When was the last month stock funds had net outflows?
A. December 2002--a couple of months after the bear market bottom (andalso in tax-selling season) and a few months before the big rally startedin March 2003, with the invasion euphoria.
Q. What should investors do, Don?
A. Try not to let the current news get to you! Have some discipline andthink a little contrarian. Hard to do, but profitable! Being diversifiedhelps you to sleep better, too.
#
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).
To read more Interviews, please visit the column archive.
