Mutual Fund Flows

Bianco on Mutual Fund Flows:

• The Wall Street Journal – Investors Pull Cash Out of Bond Funds
Mutual-fund investors continued to pull money out of bond funds in the latest week, and they weren’t just fleeing muni funds. For the first time in two years, they were also shedding corporates and Treasurys. The Investment Company Institute reported Wednesday that $1.66 billion flowed out of bond funds in the week ending Dec. 8, driven mainly by a $1.26 billion outflow from muni funds. Munis have suffered outflows for five straight weeks now, which is the longest stretch in two years. Of particular note, taxable bond funds lost $401 million last week, their first weekly outflow since December 2008. Equity funds saw losses too, down $1.4 billion last week. Long-term mutual-fund outflows totaled $3.25 billion in the latest week. The data marked the third week in the past month of net outflows for bond funds, which had seen a 99-week stretch of inflows following three months straight of outflows in the immediate aftermath of the financial crisis.

• MarketBeat (WSJ Blog) – Has The Great Bond Selloff Begun?: A Couple Thoughts

Mutual-fund investors are still yanking money out of bond funds, and they’re not just fleeing munis any more. For the first time in two years, they’re also shedding corporates and Treasurys…A new wrinkle in the latest data, though, is that taxable bond funds lost $401 million last week, their first weekly outflow since December 2008. Lest anybody think this is the start of the long-awaited great migration out of bonds and into stocks, equity funds lost $1.4 billion last week. It looks like fund investors are putting their cash in money-market funds, mainly. This is consistent with the broader sense that nobody’s making big bets on anything before the end of the year.

Comment

The weekly mutual funds described above are shown in the chart below.  If this is the start of a great exodus from bond funds, then it only began last week as the outflows expanded beyond just muni funds.

Highlighted in the story above is one of the great misconceptions about bond fund flows.  Bond mutual fund investors are not struggling with a choice between stock or bond funds. As we detailed here, the massive flows into bond funds came from 0% yielding money market funds.  Only about 3% of the inflows into bond funds went into long-term Treasury funds.  An over-sized amount went into short-term muni and corporate funds.  In other words, the public traded a 0% money market fund for a 1% short-term bond fund.  Even with the recent rise in rates, this has been a good trade for them so far.

We would argue if higher rates are going to chase mutual fund investors out of bond funds, they are not going into stock funds.  Instead they would go back to 0% money market funds.

Stock funds have suffered 32 consecutive weeks of outflows, every week since the market highs in April.  As we explained here, the public is not buying stock funds because they did in huge numbers earlier this decade and they are still sitting on losses.  They are not interested in doubling down on a bad trade.  Further market rallies will only reduce losses and not create the Federal Reserve’s much hoped-for wealth effect.