BREAKING DOWN THE MUTUAL FUND FLOWS
The Investment Company Institute (ici.org) compiles statistics on mutual funds and publishes them monthly. (There is a one month delay between the end of the month being reported and publication.) Decision Point has been collecting these data for almost five years, and we finally have enough to start charting it. Amounts shown on the charts are in billions.
The bottom panel on the first chart shows the percentage of of mutual fund assets held in cash. A low percentage of cash indicates that fund managers are bullish on stocks and do not believe they will need much cash to meet redemptions, as would be the case if stock prices were to fall. The current percentage (3.4%) is lower than what it was near the top of the last bull market. I would consider that to be bearish for stocks.
The next chart shows assets in money market funds. What stands out to me is that, while money market assets have declined since the 2009 market bottom, they have not dropped to the levels seen during the bull market in 2005 and 2006. I interpret this as evidence of investors’ reluctance to make a robust commitment to stocks, in spite of a substantial advance from the bear market lows.
Bottom Line: We seem to be getting mixed signals from the mutual fund assets data. The low percentage of cash held by fund managers is bearish for stocks; whereas, the level of money market fund assets shows plenty of cash on the sidelines which could be used to feed a substantial advance in stocks. On the other hand, perhaps the relatively high money market levels indicate that investors have reached their maximum tolerance level for risk in stocks and that they will not be committing any more money to the stock market. I am not sure if this is the correct interpretation, but it would seem to be confirmed by the consistently low volume the market has experienced during the advance from the 2009 lows.
TPC, isn’t the percentage in cash reflective of the performance of the other equities (stocks & bonds) mutual funds hold. For example if they hold 3% cash and the rest in equities and say we have a 50% decline in those equities the cash holding would approach close to 6%. I guess my point is that the I suspect the percentage cash chart on the bottom panel is less reflective of a mutual fund’s bullishness/bearishness sentiment than it is a reflection of the performance of the equities they hold.
The correlation between percentage cash (bottom panel) and NYSE composite index (top panel) is clear, but I think the guys at Decision Point got the cause and effect the wrong way round. Seems to me on average mutual funds are invested in equities at a very percentage level all the time (i.e. they’re always bullish) with a very modest cash buffer in case of redemptions.
at a very “high” percentage level all the time
Yeah, cash would change with changes in the equity pie.
I think people are missing an important element to the high level of MM funds: it’s more than a loss of risk tolerance. For a lot of people, they are cashing in their investments in order to make ends meet. This is being driven by both the recession (which I don’t believe had ended) and demography shifts as the baby boomers retire.
In all of my reading, I have yet to see anyone really make this argument. Cash outflows from mutual funds are being spent! This isn’t a risk aversion play. And the money won’t be coming back.
I agree with this and it also matches up with reports that folks are cashing out 401Ks to make ends meet.