Saturday, April 10, 2010

Investors Continue Piling Into Bond Funds

One thing investors have a tendency to do is chase returns. Market technicians look at investor fund flow data as a contrarian signal. Given the poor long term return of many stock related investments and the strong bond returns one would think investors might be more attracted to equity investments at the moment. In fact bonds have outperformed stocks over the last 10 and 20 year period and given the low level of interest rates can this possibly continue? In a recent research piece by Fidelity titled, Stocks Anyone? (PDF), it is noted,
"investors actually took money out of stock funds on a net basis during the past year. Meanwhile, the $385 billion of net flows investors put instead into bond funds is more than they ever put into stock funds during a 12-month period—even during the technology bubble of the late 1990s."
Although investors are investing some of their funds into equities, a majority of the inflows are going into bond funds as outlined in the below table.

Additionally, the below charts indicate graphically that investors do have a tendency to chase returns; however, that has not been the case over the course of this past year. Although stocks are outperforming bonds significantly, net flows continue to favor bond funds.

Maybe the significant equity shocks of the last decade (technology bubble and real estate bubble) have resulted in investors taking a longer perspective on equity returns. The below chart compares the 10-year rolling relative performance to fund flows.

This lack of investor interest in stocks is a contrarian sign that suggest equity investors might have a performance advantage compared to bond investors on a forward looking basis.


Stocks Anyone? (PDF)
Market Analysis, Research & Education
By: Dirk Hofschire, CFA
March 25, 2010

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