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.
Over the last several weeks more light has been shed on the State of Florida’s investment pool. Approximately three weeks ago some of the various school boards and smaller governments began questioning the composition of short-term instruments found in the Local Government Investment Fund. This coincided with SIV and other conduit headlines from Citibank leading to a multi billion dollar “bank run“.
Florida officials voted to suspend withdrawals from an investment fund for schools and local governments after redemptions sparked by downgrades of debt held in the portfolio reduced assets by 44 percent.
“If we don’t do something quickly, we’re not going to have an investment pool,” [Coleman] Stipanovich [executive director of the State Board of Administration which manages the fund] said at the meeting, held at the state capitol in Tallahassee. The fund was the largest of its kind, managing $27 billion before this month’s withdrawals.
Local authorities contemplate ways to stop the bleeding.
“We need to protect what is there in the interim,” said Governor Charlie Crist, a Republican and one of three trustees of the State Board of Administration along with Florida Chief Financial Officer Alex Sink and Attorney General Bill McCollum.
The fund has invested $2 billion in structured investment vehicles and other subprime-tainted debt, state records show. About 20 percent of the pool is in asset-backed commercial paper, Stipanovich said at the meeting today.
“There is no liquidity out there, there are no bids” for those securities, he said.
- According to Bloomberg.com, “The pool was created in 1982 to provide higher short-term returns for local schools and governments than were available at banks.” Just another example that “more money is lost reaching for yield than at the point of a gun.”
- Liquidity breeds illiquidity.
Apparently Mr. Paulson’s subprime “containment” theory has been tarnished. Over the past few days numerous financial institutions, including GE , have announced impairments to either money market or short term bond funds.
A short-term bond fund run by General Electric Co.’s GE Asset Management returned money to investors at 96 cents on the dollar after losing about $200 million, mostly on mortgage-backed securities.
The GEAM Trust Enhanced Cash Trust, a short-term bond fund with about $5 billion in assets, told non-GE investors on Nov. 8 that they could withdraw their money before losses mounted. Enhanced cash funds usually offer higher yields than money- market funds by investing in riskier assets.
GE joins a growing list of other US asset managers warning of credit related hits. The $1.4 billion State Street Limited Duration Bond Fund, which lost more than a third of its value in the first three weeks of August, has recently been sued by Prudential and other institutional investors. On Monday, Bank of America announced over $3 billion in CDO write downs while adding $600 million to various money market funds in order to preserve the $1 NAV. Other asset managers announcing similar charges include Legg Mason, SEI Investments and Suntrust Bank.
My Comments: It seems every time a write down is announced from one of the large financial institutions we hear the spin “worst is behind us” or “charges were lower than expected”. At what point do investors scream uncle?