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Rekenthaler Report

Are Stock Funds Attracting Too Much Money?

The signals are mixed.

Generally speaking, bull markets don't end in silence. They end loudly and visibly, after the successful asset class receives an influx of new assets. Many regard mutual fund cash flows as a version of the canary in the coal mine--the indicator that suggests a future problem. Unlike the feathered canary, however, who suffocates to send its signal, the fund canary collapses from gluttony. Fund categories that attract a high amount of new investor monies, as indicated by net sales (that is, gross sales minus redemptions) are fund categories that may be overbought and, therefore, ripe for a fall.

That pattern has held pretty well for U.S. stocks over the past 15 years. In the late 1990s through 2000, U.S. stock funds enjoyed their highest inflows ever, at the S&P 500's top; they retreated into redemptions in 2002, at the market bottom; they recovered to enjoy positive inflows until the 2008 crash; and they suffered consistent outflows from 2009-12. An investor who used one year's information about U.S. stock fund cash flows to influence the next year's asset allocation, cutting back on stocks if inflows had been strong and adding to stocks if equity funds had suffered outflows, would have fared nicely over the past 15 years, aside from being too cautious in the middle part of that stretch.