Patrick Galley: Psychology of greed and fear will drive the market

The illogical nature of investor psychology could fuel the next stage of the stock market rally, potentially pushing prices beyond fair-value range, according to Patrick Galley, manager of the RiverNorth Core Opportunity Fund (RNCOX). “While on a fundamental basis we believe most equity markets are priced at fair-valuation levels, given the economic backdrop, the wild card is the psyche of investors in that they could drive valuation levels above and beyond fair value as greed comes back into play,” he said. Mr. Galley pointed out that there were $234 billion in net outflows from equity mutual funds last year, according to data from the Investment Company Institute — and just $2 billion in net inflows through the first nine months of 2009. This, he noted, underscores just how much money is still waiting to move back into the market. “Unfortunately for many, the psychology of the investor has gotten the best of them,” he said. “Many investors have missed the historic rally because they dumped their equity mutual funds in 2008 and have been too fearful to reinvest.”
One way to capture value for investors just now returning to the market is to use closed-end equity funds, many of which are trading at discounts to net asset value of 15% or more, Mr. Galley said. “While we believe the easy money has been made, we think the attractive discounts on many closed-end funds give investors a margin of safety for maintaining equity exposure,” he added. The $285 million RiverNorth Core Opportunity Fund, which was launched in early 2006, gained 45% this year through Oct. 15, and gained 52.6% over the trailing 12-month period.