Lies, damned lies, and equity mutual fund statistics
The lead story in Sunday’s NYT was by Graham Bowley, and it was quite alarming:
Renewed economic uncertainty is testing Americans’ generation-long love affair with the stock market.
Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year…
If that pace continues, more money will be pulled out of these mutual funds in 2010 than in any year since the 1980s, with the exception of 2008, when the global financial crisis peaked.
Small investors are “losing their appetite for risk,” a Credit Suisse analyst, Doug Cliggott, said in a report to investors on Friday.
The story was picked up by Josh Brown, who said that in fact things were even worse than Bowley made them appear:
This has absolutely nothing to do with “risk appetites”…
What you’ll find is that people are now eating into their portfolios and living on their investment capital, they would prefer to pay bills (ar at least keep bills at bay) than worry about speculating in a market that makes little sense to them anyway (rallies on bad news, anyone?).
The men and women behind these outflow stats have been burned twice in a 7 year period and now there are taxes to pay and small company payrolls to meet and credit card bills to reconcile. There are car leases and financing payments to be dealt with and, oh would ya look at that, the roof done sprang a leak again…
The people are making withdrawals from their portfolios because they are starving for cash.
It’s as simple as that.
Except, it’s not remotely as simple as that. On the same day that Bowley’s article appeared on the east coast, Tom Petruno was writing a very different article for the LA Times:
In the first half of this year, redemptions of stock funds by people who needed or wanted their money were large enough to nearly offset the $724 billion in gross purchases by new buyers. The result was a net cash inflow of just $9 billion to the funds, according to the Investment Company Institute, the fund industry’s trade group.
By contrast, redemptions of bond funds were much less than new purchases, leaving those funds with a hefty net inflow of $156 billion in the half.
So bond fund assets are growing rapidly, but they’re still significantly less than what’s in stock funds. Bond funds held $2.4 trillion as of June 30 compared with $4.6 trillion in stock funds.
What’s going on here? Are mutual fund flows negative, as Bowley has it, or positive, as Petruno has it? The fact is that Petruno is much closer to the truth, and Bowley seems to have cherry-picked the worst number he could find. And Brown doesn’t seem to be right at all.
All of the numbers being cited here come from ICI, whose statistics you’re welcome to browse yourself. But they don’t cover the period through July, which Bowley is talking about: Bowley’s only using estimated July figures, and the official ones won’t come out until next week. Petruno is using the official figures, which run through June.
But even so, they don’t seem to add up. Were equity-fund flows positive through June, as Petruno has it, only to turn sharply negative in July, as Bowley would have you believe? No. The key word to note in Bowley’s piece is the word “domestic” — if you look only at funds investing in domestic equities, they have seen net outflows this year. But if you look at all stock-market funds, including those investing in the rest of the world, the outflows were positive through June; if you add in estimated flows through July, they’re modestly negative to the tune of less than $5 billion.
So really, equity mutual-fund flows are more or less flat so far this year: inflows are roughly the same as outflows. And remember that all of these figures are the difference between two large numbers: in the first half of the year, for instance, $724 billion flowed into equity mutual funds, and $716 billion flowed out. Which numbers help put Bowley’s $33 billion number in some perspective.
What’s more, equity mutual-fund outflows are largely a function of retired people withdrawing their money from the stock market. They would normally be offset by the flows of working people who are putting their money into the stock market. But those people are increasingly moving away from mutual funds and towards ETFs. And if you look at the ETF data, there was positive net issuance of another $38 billion in the first six months of 2010 — significantly more than Bowley’s $33 billion figure. Sure, some of that will have gone into bond and commodity funds. But most of it will have gone into equities.
So the big picture is clear, although you’d never guess it from reading Bowley’s story: people are still putting more money into the stock market than they are withdrawing from it.
And the bigger picture is even clearer: people are saving more and more money, and investing it in the market more broadly. ICI was good enough to send me the estimated year-to-date figures for all mutual funds — not just equities but bond funds and hybrid funds too. Add them all up, and you get a whopping net inflow of $208 billion. Which would seem to put the lie to Brown’s assertion that “people are making withdrawals from their portfolios because they are starving for cash”. In fact, they’re investing their cash to the tune of hundreds of billions of dollars, and they’re withdrawing money from their risk-free money-market funds to do so. (For the first half of the year, money-market funds saw net outflows of $509 billion.)
As Petruno says, people still have a lot more money invested in stocks than in bonds. So if they want to balance things out a bit more, then their marginal monthly investments are likely to be weighted more towards bonds than towards stocks. That’s going to make bond funds see lots of inflows, compared to stock funds. But it doesn’t mean that people are pulling their money out of the stock market. They’re not.