The Great (Sort Of) Rotation

So, in the final analysis was there a Great Rotation this year? I say yes and that it hasn’t fully played out yet. Some say “no” because their portfolio positioning or job they work in won’t allow them to face facts. And then some say “Yes, but…” and offer us a more nuanced view. 

Here’s Nicholas Colas, chief market strategist at ConvergEx Group, with his take on the Great Rotation this year…


Mutual fund investors are leaving bonds, but their destinations all require passports. For the year-to-date, they have withdrawn some $69.4 billion from fixed income mutual funds, with $29.4 billion in the last six weeks alone.  Much of this diaspora comes from municipal bond funds, at $52.0 billion of redemptions YTD.  On the equity side, the inflows are solidly international, at $135.7 billion year to date and $21.9 billion in the last six weeks.  Domestic U.S. stock funds fall a distant second.   Their inflows are just $22.5 billion YTD and $1.8 billion in the last six weeks.

ETF investors are equity bulls and commodity – not fixed income – bears.  Of the $187.9 billion into ETFs this year-to-date, $131.3 billion belongs to U.S. stock funds.  Granted, a piece of this is likely hedge fund shorting of products like the SPY ETF, but this is usually a hedge against single stock long positions and is therefore still overall U.S. stock-positive.  The largest outflows are from gold funds – GLD and IAU specifically – with $26.8 billion in redemptions YTD.  Bond fund redemptions are a relatively trace amount of the ETF fund flow picture at just $2.6 billion for the quarter-to-date and still positive $11.6 billion for the year-to-date.

Putting the mutual fund and ETF pictures together into one collage, the “Great Rotation” is more like a leaky faucet than a torrent of money.  Equity is the favored investment class, to be sure.  Mutual fund investors head overseas, and ETF owners stay closer to home with about $130 billion in each pocket.  Exclude the exodus from munis, and mutual fund owners look much the same as their ETF cousins.  They are not redeeming fixed income as much as they are putting fresh money into stocks.

In short, the trade in 2013 has been out of munis and gold, and into the world’s stock markets.  Look a little deeper, and the headline becomes “Mutual fund buyers are finally back”.  Just 2 years ago the U.S. mutual fund investors were net sellers of financial assets, to the tune of ($27.5 billion).  The year 2012 saw them tiptoe back, with positive flows of $117.6 billion, but still redeeming stocks for bonds.  This year inflows are $164 billion with two weeks or so remaining and substantially all of that into stocks.



ConvergEx Group, a global brokerage company based in New York