What is keeping fund investors surprisingly calm?

The S&P 500 is down 9.15% this year, but mutual fund investors aren't fleeing — and that may be because of financial advisers

Feb 9, 2016 @ 11:20 am

By John Waggoner

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The Standard and Poor's 500 stock index is down 9.15% this year, but mutual fund investors aren't fleeing — and that may be because of financial advisers.

Investors have yanked an estimated $18.7 billion from domestic stock funds through Jan. 27, according to the Investment Company Institute, the funds' trade group. That's less than December or November 2015. “The reaction to the decline has been very muted,” said David Santschi, CEO of Trimtabs.com, which tracks fund flows.

When the Dow Jones Industrial Average tumbled 178 points Monday, T. Rowe Price noticed “hardly any activity,” said Judith Ward, senior financial planner for the fund company. “The volumes today aren't any different than any other day.”

The same held true at Vanguard. “In retirement plans, 99% have done nothing during the recent volatility, and that's mirrored by people in non-retirement accounts,” said Fran Kinniry, principal in Vanguard's Investment Strategy Group. “Investor behavior today is very muted.”

Why are fund investors so calm when the rest of the world seems to be shoveling shares out the door as fast as they can? One reason is the retirement marketplace, which encourages regular investments through 401(k) and other workplace plans. “In our research, the retail investor has never experienced periods of prolonged significant redemptions,” said Dennis Bowden, managing director of U.S. mutual fund research at Strategic Insight. “They tend to be limited in magnitude and scope.”

Fund investors also tend to be a diverse group with plenty of strategies for dealing with downturns. “That type of diversity in aggregate promotes stability,” Mr. Bowden said.


The increasing use of investment advisers also has dampened redemptions in times of turmoil, Mr. Bowden said. “A large-scale move to advisers promotes a buy-and-hold asset allocation strategy,” he said.

“Most advisers believe it's impossible to time the market and don't do it themselves,” said Trimtab's Mr. Santschi.

Not all advisers are buy-and-hold advocates, however. “Within pockets of the adviser population, we're seeing centralized decision-making at discretionary programs,” Mr. Bowden said. “Within those pockets, we see elevated and volatile fund flows.”

The influence of advisers might also be seen in the surprising inflows to world stock funds the past few years. While domestic stock funds have seen a net outflow of $173.7 billion since the S&P 500 peaked in May 2015, world funds have seen an inflow of $52.5 billion, despite large losses in European and Chinese stock markets. And that's been true even before the bear market began, Mr. Bowden said. “We've seen consistent buying of world stock funds even as the U.S. market has outperformed.”


No one knows, precisely, who is doing all the selling on Wall Street. The funds themselves typically have enough cash on hand to meet redemptions, and sometimes wade into the market to buy, Mr. Bowden said. The funds themselves sometimes act as buffers to redemptions, encouraging investors to stay the course and not sell in a panic.

Mr. Santschi suspects sovereign wealth funds, which are being hurt by the strong dollar and falling oil prices, are behind much of the selling. Hedge funds, which made heavy bets on technology and financial stocks, could be another source of selling pressure.

But he takes a contrarian stance on the public's lack of worry about the market's declines, even as institutional investors slash their earnings estimates. After all, if the public's not worried, perhaps more selling is ahead when they do start to get concerned.

“Retail complacency does have us worried, Mr. Santschi said. “We're not seeing the reaction we'd expect from retail investors, given the magnitude of the selloff.”


What do you think?


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