Category: cash levels

Got cash?

At the end of last year equity fund cash levels stood at 3.6%, just off a record low 3.5% set at the top of the credit bubble in June 2007, according to the Investment Company Institute. Thanks to an 11-month 70% rally in the S&P 500 the Slope of Hope has been reconstructed even though the S&P is 26% off its mid-2007 nosebleed level.

Everyone’s a contrarian

One of the arguments making the rounds these days for owning stocks is that bond fund inflows are swamping stock fund inflows. The bulls see this as a contrary indicator: If the little guy is binging on bonds, it must be time to buy those poor neglected equities. Unfortunately for the bulls, their analysis is completely bogus. Here are the year-to-date mutual fund inflows through Sep 30:

Stock funds: +$2.6 bil
Bond funds: +$268.2 bil


Pretty compelling, right?

First of all, 43.6% of all mutual fund assets are in stock funds vs. 19.2% in bond funds. (Now which asset class looks neglected?) That $268 bil inflow amounts to 2.5%, which I’ll grant you is impressive. However, money market funds lost about $400 bil over that time so this appears to be simply mattress money reaching for yield (not a good sign).

Let’s look at the figures since the March bottom, from April-September (6 months):

Stock funds: +$45.6 bil
Bond funds: +$214.6 bil

Not as impressive. Clearly, investors are plying the risk trade in both asset classes. Now let’s include ETFs which took in $65.3 bil over that time. Since the stock/bond ETF split is 86.2%/13.8%, let’s assume 15% of those inflows went to bond ETFs and the rest to stock ETFs. Here are the adjusted fund flows over the past 6 months:

Stock funds: +$101.1 bil
Bond funds: +$224.4 bil

Now keep in mind this money is largely coming out of old savings, not new, and it appears investors have climbed further out on the risk limb than most realize.

Further, that mystical pile of cash bulls maintain is waiting on the sidelines to buy stocks looks more like a mole hill. Money market fund assets as a percentage of total mutual fund assets were 31.6% as of September 30, down from 41.3% on March 31 and at their lowest level since August 31, 2008 when the S&P 500 stood at 1283 (currently 1110). Equity fund cash levels are even less impressive at just 3.8%, the lowest level since September 30, 2007 when the S&P 500 stood at 1527.

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