Watch what they do, not what they say

You can learn a lot about market expectations and investors’ deepest fears by watching what they do as opposed to what they say.

Many strategists and media people are operating under the assumption that “rising rates” are the biggest investor fear right now, but they have it absolutely backwards – that seems to be the last thing on our collective mind right now, judging by where we’re putting out money.

Tobias Levkovich and Citi’s fund flows team looks at the year-to-date data and show a really stark change in investor appetites from 2015 into 2016. Some of the swings we’re seeing are absolutely bananas over the first 9 months of the year.

Here’s a sample of what we’ve seen so far in 2016…

Equity mutual fund outflows are completely unhinged – both US and global funds:

Total equity funds posted cumulative outflows of $158.41 billion through September down from the outflows of $9.38 billion during the first nine months of 2015.

US oriented funds experienced cumulative outflows of $149.76 billion during the first nine months of 2016, meaningfully worse than the cumulative outflows of $113.47 billion that were recorded over the same period in 2015.

Add in equity ETF inflows and the number gets a bit better, but it’s still a scary swing versus the comparable period last year:

YTD through September 2016, combined equity mutual funds and ETFs recorded cumulative outflows of $72.94 billon vs inflows of $87.12 billion attracted over the first nine months of 2015 with both domestic and international flows suffering.

So what the hell are they doing with that money? I mean, besides paying their higher health care costs? Is it piling up in cash? Not exactly. Here’s money market funds:

Year-to-date, money market funds have seen outflows of $82.01 billion versus outflows of $62.26 billion in the first nine months of 2015…In [all of] 2015, money markets attracted inflows of $21.46 billion. For the full-year 2014, money market funds recorded cumulative inflows of $6.24 billion. In 2013, money market funds attracted inflows of $15.04 billion.

In other words, money market funds are on pace to see their first year of outflows since investors took a net $180 million out in 2012.

So if we’re not buying stock funds (and we clearly aren’t) and we’re not stashing it in cash, what are we doing?

Well, I’ll tell you what we’re NOT doing – we’re certainly not panicking about rising rates, no matter how badly the media wants us to. According to ICI data collected and parsed by Citi’s Fund Flow Insights report, we’re going bananas for bond funds.


Investors added $17.68 billion to bond funds in September down from August’s $23.08 billion inflow and a major swing from September 2015’s $20.02 billion outflow…

YTD through September, bond funds have experienced inflows of $123.45 billion, significantly better than the $2.20 billion inflow garnered over the same nine-month period in 2015…

Fascinatingly, combined bond fund inflows in the first nine months of 2016 year to date were more than 4x the inflows over the same time period in 2015.

If we’re not afraid of rate hikes, but unwilling to bet on stocks or sit in cash, then it stands to reason we are more afraid of two other things: The election and fear of earning no returns.

This leads to an enormous 4x swing in bond fund inflows and the tidal wave of money sloshing out of stocks and cash. In other words, watch what they do, not what they say.

The interesting question is whether or not the election’s end, followed a few weeks later by the Fed meeting (and supposed rate hike) does something to change this dynamic.


Fund Flow Insights: A Sloppy September
Citi Research – October 28th 2016

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