Friday, November 12, 2010

Follow Mutual Fund Flows or Don't

Mutual Fund Flows
Follow the Fund Flows (Better Yet: Don't)


Consider mutual fund flows, which measure how much money investors are putting into or taking out of different types of funds. Around the turn of the millennium, on a net basis, investors were fleeing safe but ho-hum bond funds for the raging returns of stock funds, which had been driven to record highs by dot-coms and other hot '90s success stories.

The result? Third-degree burns for those who ignored valuation considerations and plunged into stocks in the year 2000.

Fast-forward to today and a situation that's almost the exact opposite. The 2008 onset of the credit crisis prompted a mass flight from stocks of all stripes, at any price. Equity funds stopped hemorrhaging in 2009 and early 2010, but fund flows to stocks remain well below normal.

Fixed-income securities, meanwhile, are all the rage--despite the paltry rates on offer. People think of Treasuries as a risk-free return. Today, however, they're more like a return-free risk. Did the crowd make the right call this time around? I doubt it.

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