Retail Investors Are Still Selling Equity Funds . . . A Contrary Indicator?

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The ICI reports that retail investors are still selling equity mutual funds and buying bond funds. Is this a contrary indicator, i.e. that mutual fund investors get the timing wrong and the winning strategy would be to buy unpopular fund categories?

We recently published a story online about how Morningstar has shown that investors do in fact chase performance and therefore get the timing wrong --- despite the fact that retail investors are now more sophisticated than they ever have been. Here is what Don Phillips of Morningstar told us:

"But despite their increasing sophistication, millions of investors persist in buying the latest hot funds. In the late 1990s, shareholders dumped bond funds and bought stocks funds. That proved an ill-timed choice, said Phillips. During the decade that began in 2000, bond funds returned 7 percent annually, while stock funds stayed about flat. Many stock investors suffered poor results because they bought at the top of the market. After suffering through a downturn, they sold near a trough."

Morningstar noted today that year-to-date (and despite concerns over Europe's fiscal health), retail investors have been buying international stock funds but selling domestic funds. Alternative funds are also gaining in popularity and have enjoyed record inflows --- PIMCO Fundamental Advantage Total Return being the most popular.

Strategic Insight reported today that ETFs inflows year-to-date are also positive, particularly gold ETFs, emerging markets ETFS and taxable-bond ETFs. SPDR Gold Shares were seconmd-most popular.

The ICI said in a release yesterday: "Total estimated inflows to long-term mutual funds were $435 million for the week ended Wednesday, July 7.

"Equity funds had estimated outflows of $4.23 billion for the week, compared to estimated outflows of $216 million in the previous week. Domestic equity funds had estimated outflows of $4.12 billion, while estimated outflows from foreign equity funds were $112 million.

"Hybrid funds, which can invest in stocks and fixed income securities, had estimated outflows of $1.36 billion for the week, compared to estimated outflows of $25 million in the previous week.

Bond funds had estimated inflows of $6.02 billion, compared to estimated inflows of $3.49 billion during the previous week. Taxable bond funds saw estimated inflows of $5.04 billion, while municipal bond funds had estimated inflows of $979 million.

"Data for previous weeks reflect revisions due to data adjustments, reclassifications, and changes in the number of funds reporting. Historical flow data is available on the ICI website."

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REP. Editor-in-Chief David Aldo Geracioti on the business of Wall Street from a free-market perspective.

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David Aldo Geracioti

Is the editor-in-chief of REP. magazine.  He is also a devotee of the Austrian School of Economics leading lights Ludwig von Mises, Friedrich von Hayek, Murry Rothbard and to other thinkers in...
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