Sunday, May 04, 2014

Are Mutual Funds Preparing For A Correction?

From an asset allocation perspective individual investors' equity weighting has reached a level last seen in mid 2007. According to the American Association of Individual Investors monthly asset allocation survey, the equity weighting at the end of April equaled 67%. This is down slightly from the 67.2% in the prior month; however, the prior high in the equity weighting level was 68.6% reach in June of 2007.

From The Blog of HORAN Capital Advisors
Source: AAII

Certainly the strong equity market advance since the end of the Great Recession has contributed to this higher equity weighting. Also, in spite of the fact investor fund flow data shows investors were cautious on allocating funds to equity until the beginning of 2013, equity flows continue to be positive. A bit surprising is the fact investor fixed income flows were positive in February and March as can be seen in the below chart.

From The Blog of HORAN Capital Advisors

So given the strong equity advance since 2009 and the individual investor's desire to increase equity exposure, generally late in a market cycle, are mutual fund companies preparing for an equity correction? The market has not experienced a 10% plus correction since late 2011.

From The Blog of HORAN Capital Advisors
Source: MarketWatch

The below chart compares liquid assets of mutual funds to the trend in the S&P 500 Index. The chart would seem to indicate fund managers are having more difficulty finding attractive investments and, maybe at the same time, preparing for investors to reduce equity exposure at the first sign of a market pullback.

From The Blog of HORAN Capital Advisors

In reviewing several sentiment indicators like the AAII Sentiment Survey and the Commitment of Traders Report, excessive bullishness by individuals or small investors does not seem present at the moment. These sentiment indicators can change fairly quickly though.

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