Goodbye to the little guy (Fund-Flows)

verfasst von Popeye, 09.08.2002, 10:57

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American equity markets

Goodbye to the little guy
Aug 8th 2002 | NEW YORK
From The Economist print edition


There are signs that small investors are dumping
mutual funds. Does it matter?

THROUGH the long bull market, individuals learned
that the most effective way to make money was to
buy more stocks. Until the final manic phase when
day-trading took off, their favoured way of doing so
was through mutual funds. The process was often
perceived to be a virtuous circle, with new money
boosting share prices, which brought in fresh money
which further boosted share prices, and so on. There
is a pervasive fear that the opposite could be
unfolding now: a downward spiral, with declines in
share prices prompting waves of redemptions and
further price declines. It is a seductive theory, but
questionable.

As the bear market began in March 2000, the first to
leave, often not by choice, were the last to arrive.
Heavily margined day-traders were quickly wiped out;
unleveraged day-traders had only a bit more time to
discover how little gratification there is in losing
money. Brokerage firms catering to this crowd
disappeared. Fund investors were noticeably more
patient, contributing more money every month in
2000 and, overall, in 2001 as well. But there is
increasing evidence that finally, more than two years
after the Nasdaq peaked, their patience is wearing
thin.

In June, investors took
$18 billion more out of
equity funds than they
put in (see chart). It
would not be a
surprise if the number
in July topped the
record $29 billion
removed in a panic
last September,
immediately after the
World Trade Centre
attack. August is
unlikely to be much
better than July, and
could be far worse.
Barring a huge shift in sentiment, 2002 is likely to be
the first year since 1988 of net redemptions. Add in
rumours of heavy selling in the American markets by
large investors in the Middle East and suddenly, there
appears to be a shortage of buyers on Wall Street.
Can that be anything but bad for investment in
America?

Certainly it will not be good for brokerage and
asset-management firms. The prospect of losing
assets will have investment implications. If forced to
dump stocks to raise cash for departing investors,
these firms may choose between selling off the
companies that are particularly risky, or the ones that
are most liquid."We do not know what sort of change
in strategy it would induce," says Henry Kaufman, an
economist and investment manager, but if the
redemptions continue, the liquidity of positions will
inevitably become a greater consideration. That will
be bad news for the less mature companies that need
capital most, and indeed for an economy that thrives
on providing financing at high risk for high reward.

The pressure on investors to sell may only increase in
the months ahead. As an experiment, Merrill Lynch
calculated the break-even point for a person who
began investing on a monthly basis in 1990, when
America's interest in funds exploded. Returns were
assumed to be the same as those of the overall
market. Break-even would be 776 on the broad
Standard & Poor's composite index, a level the
market fell perilously close to in recent weeks."Once
you fall below that level, the risk appetite will
change," says David Bowers, at Merrill Lynch. Over
and above lost profits, the losses will start to eat
into capital. Not only may that be seen as particularly
threatening; once profits are lost, one of the main
reasons to avoid selling a fund disappears-the need
to pay capital gains tax. (In fact there is an incentive
to take the loss and set it off against other taxable
gains.)

But there are contrary forces at work. American fund
investors have generally been a stubborn lot, perhaps
because those with truly long horizons have
historically done well. Information dating back to
1943 collected by the Investment Company Institute,
a trade group, shows that periods when redemptions
of fund shares exceeded purchases have been
short-lived. Indeed, in many bear markets, notably
those of 1966, 1969, 1973-74, 1977 and 1981,
redemptions actually slowed (though sales of
additional fund shares slowed even more), says Avi
Nachmany of Strategic Insight, a consultancy.

Odder still, managers of mutual-fund portfolios have
not responded to redemptions as one might assume:
by selling out positions. There were three periods
over the past two years with net redemptions. In two
of those periods, March 2001 and June 2002, portfolio
managers were heavy buyers of equities, according to
Strategic Insight, and in the third, last September,
their sales of shares accounted for less than
one-third of redemptions. There are two reasons why
this is possible: first, funds typically hold a reserve of
5% cash; second, automatic payments through
retirement accounts mean there is some comfort that
more cash is on the way.

However, this explains only why they can buy, not
why they would. For that, a good reason is that the
declining share prices that spook investors are
perceived by portfolio managers in the same way as a
sale in a store."Historically," says Steve Leuthold, a
fund manager and market analyst in Minnesota,"the
public has done the wrong thing both at stock-market
peaks and stock-market bottoms."

Indeed the strongest months for fund investment
were the first three months of 2000, just as the
market crested. A previous record in 1969 occurred
when the last bull market was peaking. There were
heavy redemptions in 1981, just as the current bull
market began, and there were huge net redemptions
following the crash of 1987, which with hindsight was
a wonderful time to buy. It is tempting to believe
that share prices are set by mass enthusiasm or
despair. Yet clearly this liquidity-based theory is
flawed, at least in a market as broad and deep as
America's. On the other hand, when the masses are
enthusiastic or despairing, it seems like a good time
to be the reverse. Over time, the absent punter has
proved a good omen.

Quelle: Economist



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• Goodbye to the little guy (Fund-Flows) - Popeye, 09.08.2002, 10:57