Money flows to investment company funds since 2008, and what they tell us

Recently on his Calafia Beach Pundit blog, Scott Grannis pointed out the data that shows what he terms "an impressive exodus of investors from domestic equity funds over the past several years."  As the chart above illustrates, using fund flow data from the venerable Investment Company Institute (ICI), there is no denying the exodus that Mr. Grannis describes.  We believe this is significant and worth some further comment.

The chart above depicts the ICI data of monthly total dollar flows into (or out of) equity mutual funds as a red line, and the monthly total dollar flows into (or out of) bond mutual funds as a blue line.  The scale on the left measures the flows in millions of dollars, with a zero line in bold.  When net flows for a month are positive for equity funds, for instance, the red line will be above the bold zero line.  When net flows for a month are negative for equity funds, the red line will be below the bold zero line (a net "negative inflow").

As Mr. Grannis observes, the equity market recovery that has taken place since the financial market panic and recession of 2008-2009 has occurred in spite of very heavy outflows of investor dollars from equity mutual funds.  A few notable months are marked above, in red letters for equity and blue letters for bonds.  For instance, in September 2008, equity mutual funds experienced net outflows of fifty billion dollars in investor assets.  The following month the stampede out of equity funds was even heavier, with a whopping seventy billion additional dollars leaving equities.  The same month, bond funds were also experiencing heavy redemptions, with over forty-one billion dollars exiting bond funds in October 2008 (not marked on the chart but clearly visible in the lowest point on the blue line above).

Since the end of the 2008-2009 bear market, which turned around on March 9 of 2009, equity mutual funds have experienced less severe outflows of assets, and even a few months of positive inflows, but in general the net flows for equity funds have been almost all negative.  The outflows have not crossed the forty billion line again, but they have often been greater than twenty billion going out per month.  There were a few periods in which investors in the aggregate briefly added to equity funds, only to change their minds shortly thereafter and return to net withdrawals.

As Scott Grannis also points out in his post, inflows into bond funds over the same period since the 2008-2009 recession have been mostly positive, indicating that on the aggregate investors have been generally pulling money out of equity funds and into bond funds since 2008.

Unfortunately for investors, this exodus from "risky" equities into what are perceived as "safer" bonds is not necessarily a wise way to allocate assets.  We have pointed out in the past that historical data from the 2000-2002 bear market indicates that investors in the aggregate were pulling money out of equity funds  (and plowing money into bond funds) at the very bottom of the equity markets, just as they were piling money into equity funds at record rates just prior to the equity market collapse in 2000.

That post was published in September of 2008, as investors in the aggregate were selling equities at very bad prices.  We continued to advise against panicked selling right up through the March 2009 market bottom (at a point when many who had hung on at the end of 2008 were losing their resolve and selling their shares).  In fact, we were making portfolio acquisitions of well-run growth companies at that time, which would perform very well during the ensuing months and years.

More recently, we pointed out the exact same phenomenon discussed by Scott Grannis above in a post dated October 2010.  At that time, we remarked that:
This kind of behavior is exactly what leads to the dismal long-term returns highlighted by numerous Dalbar studies year after year, which we have discussed in several previous posts. While many articles (such as the Times article) focus on this as the behavior of the "small investor," it is important to note that many of these small investors [individuals, regardless of wealth, as opposed to institutions] are in fact advised by professionals who bear much of the blame.
The most recently-published 2012 Dalbar study confirms the same general pattern discussed in the link from that 2010 post, and seen in previous Dalbar studies stretching back to 1994.   In that 2012 study, Dalbar found that the average equity mutual fund investor achieved a return of negative 5.73% in 2011, in spite of the fact that the overall equity markets as measured by the S&P 500 grew by a positive 2.12% that year.  The same study found that the long-term results were equally dismal: for the twenty-year period ending in 2011, the average equity investor achieved an average annual return of 3.49%, while the markets as measured by the S&P 500 grew at an annualized rate of 7.81%.

As usual, the authors of the Dalbar study conclude that the kind of stock-market guessing indicated by the stock and bond inflow/outflow data we have been discussing above is a major factor contributing to the self-inflicted damage investors experience.

We have consistently declared that we cannot predict markets, neither the stock market nor the bond market, but that we believe that careful analysis and a disciplined process can uncover exceptional companies whose performance over long periods of time can be predicted to some degree.  We advise our readers to focus on owning the securities issued by such businesses*, and to avoid the dangerous practice of trying to jump in and out of the stock market and/or the bond market.

As an aside, we have written elsewhere about our belief that investors should focus on individual businesses and the individual stocks or bonds issued by those individual companies, rather than investing in mutual funds (whether equity mutual funds or bond funds).