The Inflow/ Outflow Data Debate

Felix Salmon takes a few of us covering the mutual fund inflow/outflow story to task in his piece Lies, Damn Lies and Equity Mutual Fund Statistics.

He cites the fact that the popular New York Times article on the subject was cherry-picking the most dire stuff and that, in the aggregate, net money flowing out of stock mutual funds year to date (not counting July/August) is in fact not very notable at all.  He cites an LA Times story that shows as much.  Then Felix  throws in the bond fund and ETF inflow data (which is strong) to make the case that my assertion that investors are starting to pay bills with brokerage capital is false.

He may be half-right, and if so, I’m betting he is right only for now.  Summer data isn’t yet available but I expect yet another rout for stock funds.

I’ll say the following in defense of my point…

1.  Equity mutual fund inflow data is actually atrocious, and the Bloomberg story on the subject is more important than either the NYT or LAT version.  In fact, the LAT piece read like an “In Defense of Stocks/You Can’t Time the Markets” piece right out of BusinessWeek circa 2001.  The gist of it seemed to be that we “shouldn’t listen to the conventional wisdom, people sold stock funds after the ’87 crash, bond funds are just playing catch up, most people are still in stocks, etc.”   All true, but again, stock mutual funds (domestic and international) have seen about $235 billion yanked out over the last 30 months, a major league sea-change for the investment company industry with no end in sight just yet.  The comparison between recent purchases of stock funds versus bond funds, especially against historical norms, is a fairly stark one.  Graham Bowley is not wrong on this and neither am I.

2.  I believe that the vicious correction of June probably means that stock fund outflow data for July may be worse than expected – despite the fact that US markets staged a decent rebound during that very month.  We shall see.

3.  My original notion had been that it was the money market funds that would first see “redemption” or liquidation as the fast-disappearing individual investor chooses payment of his bills and living expenses over the desire to speculate.  And I said in this original post that it was merely a hunch based on anecdotal evidence and that I knew of no way to actually verify this hunch.  If anyone knows how to track liquidated brokerage account capital after it is withdrawn, I’m all ears.

4.  The new data from Fidelity (via Zero Hedge) about a surge in “hardship withdrawals” fits somewhere into this story.  If a notable number of 401(k) holders are willing to eat a 10% penalty just to get to those retirement funds, then it stands to reason that we are seeing/will see an even more notable number of investors pulling cash from non-retirement brokerage accounts.  Again, I am at a loss as to where this data can be found, but I’d love to hear any suggestions.

I don’t think it’s a stretch to say that stock fund holdings are becoming bond fund holdings and money market fund holdings are either going to bond funds as well or being used to pay living expenses.  This is my position and I think the data is heading in that direction right now.