Pros panic while retail investors stay cool

As strategists warned of calamity, investors dropped $3B a week into emerging-market funds

Feb 14, 2014 @ 7:14 am

retail investors, institutional investors, mutual funds, emerging markets, international equity
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(Bloomberg News)

Maybe American retail investors aren't as clueless as some in the financial industry think.

All last month, Wall Street investment houses warned of calamity in emerging markets. By Feb. 5, the MSCI Emerging Market stock index was down almost 9% for the year. Conventional wisdom holds that, in times like this, retail investors panic, locking in losses rather than taking Warren E. Buffett's classic advice to buy “when others are fearful.”

Instead, while institutional investors freaked out, U.S. retail investors stayed cool. Actually, more than cool; in the midst of the mess they poured $3 billion a week into emerging-markets funds this year, according to EPFR Global. Institutions and overseas retail investors, meanwhile, sold at upwards of nine times that rate. That weekly $3 billion fed into the $17.4 billion total that flowed into international equity mutual funds last month, the most since February 2013, according to new Morningstar Inc. data.

All this hardly gibes with a view of the investing public as hopeless bumblers doomed to sell low and buy high. "They do everything wrong," says Lance Roberts, chief economist and chief executive officer at STA Wealth Management, summing up the pretty condescending consensus among many advisers and academics. (Of course, it's in an adviser's interest to make potential clients feel out of their depth.) But contrarian investing in emerging markets isn't the only non-lemming-like move retail investors have taken lately. They're also ditching actively managed funds for cheaper index funds. Jack Bogle would be proud.

Granted, individual investors haven't turned into financial geniuses overnight. Maybe they'll lose their cool. Or, they could stay calm and emerging-markets stocks could continue to fall for a while, making retail investors look stupid over the short term. That said, big-name investors such as BlackRock Inc.'s Larry Fink and Templeton Asset Management's Mark Mobius now say shares look cheap.

So maybe a less patronizing view of the average little-guy investor is in order. Thanks to the expensive, unwelcome education provided by the financial horrors of the last dozen years, the American public may just be savvier on money matters than they've ever been.

Or maybe they're not, says Efficient Frontier's William Bernstein, when asked about the retail investor data. “I don't think that institutional investors are any smarter than retail ones,” he says. “Both are, in general, pretty dumb.” That's one way to put it. Another, less insulting way to put it: Investing is really difficult for almost everyone.

(Bloomberg News)

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