Special Bulletin

Before we posted our normal Sunday thoughts below, we received an email from London stating that Ralph Acampora is now looking for a 23% correction. To me this is an important message.

Ralph Acampora is, in my opinion and that of many others, the Dean of Technical Analysts. He has taught courses all over the world on the use of charts and other quantitative data to predict price movements of stocks and markets. He has help found market analysts groups in many places and helped to develop their own qualifying exams.

Ralph has been a bull on the U.S. market since 2009, and this is the first that I have heard of his turning bearish. Not only is he a friend but also I deeply respect his talents. Nevertheless, I need to put his warning into perspective. My study of market history has me prepared for a 25% decline from peak levels three times in any ten year period. Once a generation, a 50% drop is normal. Our performance and that of others has produced in 2012 and for the first seven months of 2013 returns far above “normal” levels. Thus, some give-back was likely before this. However, in the context of a long-term investor who invests conservatively without leverage, a decline of 23% is painful, but tolerable.

Asian markets

On this weekend of indecision in Washington and other capital cities, Bloomberg Television reports on Sunday evening that the Asian markets do not appear to be negatively reacting in terms of currencies or stock prices.

The next ten days could prove the old Chinese curse “May you live in interesting times.”

And now back to the statistical Ranch of my normal post.

Wrong messages from fund flows

All too often, various published and internal pundits quote the size and direction of mutual fund net flow data as having some predictive power of future market directions. If they only took more time and analysis they might get some more useful insights. Both my former firm, Lipper Inc., and the Investment Company Institute (ICI), as well as some others, regularly report on actual or estimated fund flows. While we get monthly data as an associate member of the ICI, much of the trade association’s public release is also printed in Barron’s magazine.

The analysis is time-period dependent

After the sluggishness of August, one tends to forget the sharp recovery in July from June’s disappointing results. In terms of mutual fund net flow, itself a mixed metaphor for investors’ drives, July saw a net positive flow of $19 billion over June’s net redemption of $26 billion. Few, if any, pundits mentioned that the July gain in 2013 was less than the $28 billion in July of 2012. “Is the glass half full or half empty?” The answer depends on your bias. Yes, there was a swing of $45 billion from net redemptions to net sales, but the July 2013 net sales were behind $19 vs. $28 billion a year earlier. I suggest that looking at the next level down as to flows into various investment objectives shows a considerably more speculative attitude on the part of fund investors. For the most part, speculators are much more short-term oriented than they are long-term investors.

Leading investment objective net flows

Comparing June 2013 to July 2013 and focusing on the $45 billion swing to net sales from net redemptions, the following investment objective activity caught my eye:

• The largest contributor was the retirement favorite of Growth & Income: $12B.
• The next biggest swing was the insistent search for yield, Strategic Income: $11B.
• Next was the retail favorite, Growth funds: $11B.
• Seeking price protection were Short-term Corporate Bond funds:  $8B.
• Finally, Aggressive Growth funds: $6B.

These groups represent the entire swing; while there were other contributors to net sales, they were offset by a number of investment objectives which were increasingly in net redemptions. The key message that I get while looking at these and other fund statistics is that the fund business is serving investors with very different needs and proclivities. The aggregate numbers are like population numbers but not particularly helpful in setting sales strategies.

Channels show the business side of the story

I am starting with the proposition that, in general, funds are sold and not bought, which means there are forces beyond an investor’s desires that lead to a purchase of a fund or other investments. Today there are multiple ways to reach all investors who have the combination of needs and money. There is considerable overlap within these channels of distribution, with individual investors being welcomed into formerly exclusively institutional products and services as well as the other way around. Many manufacturers and distributors of fund products are active in most channels. Nevertheless, the ICI, the trade association for the fund business, attempts on the basis of surveys to allocate fund sales to a number of specific channels. In terms of the swing into net sales from a year ago, one can look at the change in the levels of sales by channels.

• The biggest change in the month of July was in the institutional channel, with net sales up $43B.
• Non-proprietary sales forces: $14B.
• Direct Marketed funds: $10B.
• Proprietary Bank funds: $3B.

What these numbers suggest is that, just as there are multiple investment objectives attracting money, there are a number of different ways money can flow into funds.

What does this mean to me as an investor?

As an example, to a car buyer the aggregate production and sales numbers for the automobile industry are of small importance. As a customer, you are interested in the production schedule of the vehicle you want and within your range of comfort, as well as the locations that you can buy and service the car. As an analyst, however, fund sales data can be very useful. Most investment management organizations manage funds alongside other accounts. These other accounts do not regularly publish performance or portfolio information. Thus, through intelligent analytical work on funds, one can see more of the institutional mind sets.

What do I see?

On this first day of September I see a strong desire for the world to become clearer, both economically and politically. However, many investors no longer have the choice of sitting on the sidelines. They are in effect making the “risk on” bet by rearranging their fixed-income into both shorter-term maturities and employing money in more risky fashion. On the equity side while the bulk of money is invested in Growth plus Growth & Income oriented funds, they are increasingly adding to Aggressive Growth and less-diversified Sector funds. There is a great deal of talk of trying to find European investments near their bottoms and some willingness to take a very long view on selected emerging and frontier markets. These various strategies may work out well, but they are not generating a lot of comfort. One caution is that I would separate the data on exchange-traded funds (ETFs) from that of the traditional mutual funds, which for the most part are being used by investors as a place for their money in terms of years. (The more the better.) In the last week, five out of the six securities that produced the most volume on the New York Stock Exchange were ETFs. I believe that most transactions in ETFs are for short-term purposes. Investors are using them to quickly modify their base long-term portfolios. It is these long-term portfolios that we manage for institutions and individuals.

Getting perspective
Future posts will reach you from London and Budapest. There are many investors there that have a lot to teach me. Not only do they see things from a different prospective, but also they use securities differently because of their tax and other regulations. Hopefully I will return wiser.

How do you use mutual fund and ETF data?

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