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Red Alert! ICI Reports Broad Shift to Bond Mutual Funds

October 21
13:49 2009

The Investment Company Institute (ICI) just released their monthly report showing mutual fund investors have undertaken a massive shift from (primarily domestic) equity funds to bond mutual funds. Released October 21, 2009, the ICI’s Long-Term Mutual Fund Flows shows equity funds suffered nearly $15 billion in cash out flows while bond mutual funds reaped in $56 billion. Hybrid funds, which invest in both stocks and bonds, also took in an additional $12 billion. The ICI report comes a mere days after a report from Hewitt Associates showed a similar trend of inflows into bond mutual funds within 401k plans.

It appears investors have decided to flee two asset classes: stocks, perhaps because of the dramatic equity gains in the last six months; and cash, perhaps because of historically low interest rates. In both cases, investors seem to have signaled their lack of confidence in at least a near term recovery in the American economy.

By cashing out of equity markets, still about 40% below their peak two years ago, mutual fund shareholders have made a statement regarding their reduced expectations for corporate earnings growth. Looking at the data internals further suggests a growing concern about the weak dollar, as foreign equity funds garnered a net positive cash inflow for the month.

The rush to bond mutual funds may indicate fund investors don’t think interest rates will rise anytime soon, possibly because the nation will continue to need the low rates to prevent further deterioration of the economy. There remains a possibility investors may have miscalculated, though. They could be chasing yield, always a dangerous move in a low interest rate environment (see “Never Buy a Bond Mutual Fund Thinking it’s a Bond”, FiduciaryNews.com, September 18, 2009).

If this trend continues, investors may be in for a terrible surprise should interest rates rise unexpectedly.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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