Morn'in Coffee,
The story repeats again regarding retail investors pulling monies from equity funds and more monies going into bond funds.
What group of investors do these reports point towards? Are pension funds included? Is this measurement only viewing funds held inside or outside of IRA's, 401k's, etc.; by individual investors?
Thank you for your insights to these questions.
Take care,
Catch
Who are these retail investors?
Comments
Secondly - to an extent - in some areas of fixed income it's likely a case of the monkey chasing his tail. Small investors perceive bond funds as safe, whereas many such funds hold large amounts of junk bonds or mortgage-backed securities of dubious merit. Investors may not fully appreciate the amount of risk in these securities and by pouring $$ in they further fuel inflated values.
Thirdly, its very likely that panicked retail investors are not so much booking profits as shying away in fear, and in many instances are raidimg retirement savings to compensate for the decline in "real" inflation adjusted income over the past decade and also to compensate for the lost borrowing power their houses once offered. I personally know of workers who pulled every dime out of their 401ks when they reached 59.5, even though they still had years to go until retirement.
Finally, as humans we like what's "hot." (I recently pitched my last "leisure" suit from 1975-:) Though stocks have done very well past 3+ years, they haven't yet caught the public fancy. The local barber no longer mentions the stock market while trimming a few hairs. The cigar shop I frequent no longer displays CNBC on a monitor all day long. Can't recall last time heard folks on a plane or in an airport lounge talking about stocks. Point: It takes time for things to gain favor among the public. Give the bull a few more years - with the Dow flirting at 20k or maybe even 25k - and the retail $$ will begin pouring in again.
One can not disagree with this situation, noted above.
However, I find it difficult to believe that that the indivdidual investor really has become this "smart" in the past 5 years. The presumption would have to find that many retail investors held their losses; and did not sell during the down period of the markets from Oct, 2008 through May/June of 2009; and/or bought in May/June of 2009; rode through the slop in the springs of 2010 and 2011; and the August 2011 whack; and have become enlightened to the point that this is "all she wrote" for the time being.
I continue to have a thinking problem in attempting to put all of this continuing data into some type of "behavioral mode" of the public at large.
Of course, the most curious part of this, to some or many here at MFO; is that I scratch my head about all of this from a "house of bonds" personal portfolio.
Take care,
Catch
As for the second part of three: http://www.zerohedge.com/news/are-401k-loan-defaults-set-resurge
I agree with you on the last paragraph as well - I think stocks will continue to be volatile, but I think over the next decade it'll likely be one of the better ways (to some degree, depending on what you're in) to maintain purchasing power.
Excellent point; and this is what I am trying to determine.
Like any of us here; I am fine with data, as long as I can understand the basis of how the data is determined.
I have to know the input, to make sense of the output. Not unlike, "Why didn't my homemade chili taste the same as the last batch?" Did I change the recipe?
Catch
The Investment Company Institute has data on global fund flows, sizes and numbers. Since 2010, the number of stock funds has increased by 500 worldwide; the number of hybrid funds has increased by 1200. Assets in "pure" stock funds are down $540 billion, assets in hybrid and "other" funds are up about $110 billion. Net sales of such funds has been positive in 6 of the past 8 quarters while net sales of pure stock funds has been positive in 3 of 8 quarters.
http://www.ici.org/research/stats/worldwide/ww_06_12
Not a complete answer certainly, but perhaps another piece of it.
David
Or maybe a lot of people are smart and market about to crash.
Without a credible crystal ball or any substantial survey that discovers some meaningful insights, an endless array of stories can be logically formulated, arbitrarily concocted, or simply invented to explain the public’s massive exodus from the equity playing field and towards more supposedly conservative investments.
The real truth is that the composite public rationale is unknown and probably takes vastly different forms for each individual decision maker. But that assertion will not stop me from opining on this matter to supplement (certainly not replace) the many fine explanations already offered by MFO members.
My overarching take is that equity investors have surrendered to Fear of Uncertainty. It has been building for many months now. It is composed of many elements; it consists of numerous unknowns and a few unknowables.
Many investors abandoned the equity marketplace near the bottom of the last downturn, and have never returned. Historically they leave at the wrong time, and are late to the rally party. Studies consistently demonstrate that investors are poor market timers, and, consequently, only earn about 30 % of equity Index returns over the long haul.
More involved investors are worried about the loaming Fiscal cliff that demands immediate attention in the lame-duck session following the November election. About $600 billion of expiring tax cuts and automatic spending cuts require immediate attention. Who knows how congress will address this impending cloud. Fidelity suggested that the impact could be as high as 5 % to the GDP level. That large a perturbation could trigger another recession.
The uncertain resolution to the European debt crisis adds still another dimension to an investor’s Fear quotient.
As the election date approaches, and the voter polling data draw tighter, overall anxiety levels increase. The election outcome is nearly a coin toss. Few investors (perhaps speculators excepted) handle uncertainty well.
So investors have been jumping ship at unprecedented levels. The equity markets are perceived as too risky now. They might be right in so doing. Uncertainty is both a personal confidence killer and a market killer.
The problem with the human tsunami into fixed income products is inflation. That too is wealth killer.
Please accept this submittal for what it is – pure speculation. But without supportive data, so is everyone else’s opinion. My guess is as good as yours; surely it is no better. None of these replies should be taken too seriously. At this moment, there is no single nor definite answer to Catch22’s original question
Have fun everyone.
Best Regards.
"As the election date approaches, and the voter polling data draw tighter, overall anxiety levels increase. The election outcome is nearly a coin toss. Few investors (perhaps speculators excepted) handle uncertainty well."
Yes - I agree with you that the less certain the election outcome, the more volatile the markets. As one who consistently strives to keep politics off the board, I would never profer that one candidate would necessarily be better for the markets than another. I don't know that - and don't think anyone else does either. But the uncertainty incumbent in our (pick your modifier) electoral process does lend itself to some bizarre pre-election markets.
Now, back to my example. We run our fund with, let's say some basic asset allocation to a custom benchmark. Let's say, for simplicity, our benchmark is 50% S&P500, 50% Barchlays AGG. So if we receive daily NET INFLOW into our fund, we would buy 50% of LC equities and 50% of IG bonds to comply with the rules of our porfolio management (or benchmark). If we are notified of the NET OUTFLOW, we raise cash the same day in a similar manner, 50% by selling equities and 50% by selling fixed income.
Let's say now we sit down for our periodic investment meeting and, due to some news (earnings, housing, europe, fed, election, sentiment, positioning, you name it...) agreed to be more optimistic in the intermediate terms. How do we translate that into our flexible porfolio? We will decide to overweight equities compared to our 50/50 benchmark. We would run a higher "tracking error" or will sell, let's say 5% of bonds and invest the proceeds into equities. If we are right, and the risk rally follows, we'll beat our 50/50 benchmark (by being 60/40 instead); if we are wrong, we are cooked of course. That investment decision that makes us change the asset allocation in the funds we manage is our active, 'professional' or 'institutional' decision and has nothing to do with the retail flows.
does it clarify a bit?
The original question area was to, "who is this retail investor?"; as is noted in the data posts regarding the transistions away from equity and into bonds and other areas.
I would merely enjoy knowing the data of "retail investor".
I do believe this time is different; aside from too many scholars in print and projected with speech via the television, stating otherwise.
Beginning with early 2009, I found too many of these folks who threw around data about a recovery of this or that; and of course, with their reasons.
On Jan. 1, 2011, the first baby boomers turned 65. And now, every day for the next 19 years, about 10,000 more will cross that threshold, according to the Pew Research Center. By 2030, when all baby boomers will have turned 65, about 18 percent of the nation's population will be at least 65 or older compared with about 13 percent now, Pew said.
The current percentage of boomers relative to the overall population of the U.S. is 26%.
This time is different, if not only from the standpoint of the amount of monies controlled by the boomers; retired or still employed. Boomers will stop contributions to retirement plans; while those boomers a bit older will begin withdraws from personal retirement plans. This will represent hugh money flows for this group; and I can not imagine how this will not affect other investors, to some extent. The various other asides have to do with technology, manufacturing loss in the U.S.; demographics (boomers/aging population), tremendous debt burdens both public and private; and of course, there are many other factors, too.
There is much to be added to the stew pot before the recipe is finished.
You noted: "The problem with the human tsunami into fixed income products is inflation. That too is wealth killer."Yes, indeed; inflation is a nasty and silence killer of investments for many invested in improper areas. Of course, part of the drive from global central banks for interest rate structuring, is the prospect of deflation. Perhaps this too, is a portion of our investing future.
As to "fixed income" you noted, and the use of the words with investing; we note for our house; that a CD is the nearest form of "fixed income" we view.
All other income that may be brought forth is "floating income". If one is in the right places at the right times; the float will be to the investors favor.
Interesting times indeed. Thank you for the input; and I can agree with you and others as to many folks have left the party; perhaps having regained enough monies to be breakeven from 2008/2009 and knowing or otherwise, may choose to take the chance with inflation and a much lower return on investments. Also, that if the retail investor doesn't know and respect the bond market and what the drivers may be; some may be surprised to the sad side.
Regards,
Catch
I agree. I am sure, too, that there are enough folks who have walked away from the investment table they were at previous; and have no plan to return.
Take care,
Catch
This first link, at the second paragraph, of the Introduction section offers some detail regarding the Retail vs the Institutional Investor. My early morning take is that the Retail Investor is linked by name and type of activity directly to Mutual Fund activity; past and separate from the Institutional client. To me, this indicates; that ICI uses "mutual fund flows" as the indicator related to the Retail Investor money flows.
I also note that while our house holds institutional share classes of some funds, the purchase is through a third party/mutual fund vendor and are not a direct purchase from any given fund company who is the originator of the fund. I further understand that we are not a registered institutional client per the SEC; which further defines an investor status. This would indicate that when we buy and sell institutional class fund shares; this activity falls into the Retail Investor criteria.
Lastly, this report is from 2004 and does not detail activity related to etf's; but I suspect the same criteria may apply and be separate by the fact of trading that comes from an Institutional client as set forth by their SEC registration.
ICI Report Regarding Retail Investor vs Institutional .......... right click this link and open in new window
This second link may contain related discussion; but is 262 pages, and I have not reviewed many sections. However, the report contains a lot of interesting data; some of which, is dollar values of holdings in various accounts types, including retail investor accounts. Take a quick scroll through this pdf document to find something that may be of interest for you.
2012 I.C.I. Factbook
Okay, enjoy and to work; I am....hi, ho; hi, ho
Take care,
Catch
(1) "... our fund's custodian accumulates the cash flows ... The Net number is either an inflow or an outflow. When ICI calculates investors flows, that's the numbers they are looking for..."
(2) "So if we receive daily NET INFLOW into our fund, we would buy ... If we are notified of the NET OUTFLOW, we raise cash the same day in a similar manner ..."
#1 makes perfect sense.
#2: * Wondering if this actual buying and selling into and out of the market shows up anywhere in the statistics? I assume not, as the same sales and purchases would than be recorded twice.
* It's bit more complicated with a large house which might hold, let's say GE, in 15 different funds. (I realize you boiled it down to a simple hypothetical.) In this case a number of teams, perhaps, report to one central official (for lack of better word) who than executes sales and purchases on behalf of all involved funds?
* Would be surprised if the sales and purchases in the open market are executed on daily basis (unless per some SEC reg). From an efficiency standpoint, would make more sense to do it in larger batches at less frequent intervals. (Of course the fund would drift slightly from its benchmark.) Would also mitigate expenses should bonds happen to be in favor Monday and equities Wednesday. Additionally, the alleged harms to other shareholders from market timers would still apply to international funds, but have little bearing on domestic oriented ones - if the buying and selling by managers was as timely as you suggest. Just some thoughts (Market's been kinda slow lately:-)
So severe outflows from equity mutual funds cause equity prices to decrease. The opposite is true of course. Inflows into the bond funds, causes mutual fund managers put all this cash to work. their buy orders overwhelm the market, and prices are rising as a result. Supply and demand at work.
that's why many professionals are not exactly saying that equities are cheap, but that equities are cheap as compared to fixed income, which is severely overpriced due to consistent overwhelming investor flows.
Of course there are other things that affect equity and bond prices, but investor flow is one of them.
Your morning coffee stop seems to be a dangerous fuel station. It appears to energize your free thinking into uncertain areas. Your introduction of demographic shifts and its impact on social and economic matters into the current discussion serves to illustrate this point.
Population growth has long been a dominant factor in the political economics arena. Thomas Malthus, near the end of the 18th century, compiled and documented statistics concerning population growth and poverty. Maybe the first, certainly not the last demographic alarmist. In the more modern era, Stanford professor Paul Ehrlich published an infamously erroneous but highly successful book in 1968 titled “The Population Bomb”. Fear sells, and in so doing rewards with huge fame and profits.
The demographic doomsday projection machinery continues unabated, with a few successes and many failures. In his 1988 international best seller, professor Paul Kennedy’s “The Rise and Fall of the Great Powers” accurately predicted the demise of the USSR. One of the controlling factors in his analysis was the population distribution disparity that existed within Russia. The developing sections of the country (Siberia) were a resource drain on the more productive segments (Moscow) of the nation.
Kennedy sees the same disparity evolving worldwide with his 1993 book “Preparing for the Twenty-First Century”. He shows a large difference between the birth rates of the developing countries and the developed countries. The issue is not simply population growth, but also where the population center of gravity resides. This dynamic is a major contributor to economic activity and growth.
Harry Dent has made a living by attempting to characterize the impact of demographics on the economy and investment opportunities. Various editions of his Roaring 2000s books have sold well. His key innovation was to characterize the spending habits of an individual as a function of his age. As life expectancy has increased, the maximum spending year of an individual has crept into the mid-50s.
In the last few decades world depopulation has become a more alarming issue. Birth rates have declined, but again, not uniformly distributed among the world’s peoples. The below-replacement rate birth rates are focused in the most highly productive societies. Again, this mal-distribution of population dynamics will influence the world’s GDP and the US GDP. Ben Wattenberg addresses these issues in his 2004 book simply titled “Fewer”. Wattenberg provides plenty of statistics, and even a few useful insights. The United States is bucking the worldwide trend. The US birth rate is near population neutral and with immigration our population is increasing.
That’s significant since our Nation’s GDP is primarily dependent upon two major contributors: population growth and productivity enhancement. Historically, our GDP growth rate hovers around 3 %; population growth contributes 1 % to that tally and productivity improvement adds a solid 2 % on average. The productivity factor explains why GDP per person increases, thus providing the prospects of a better life for everyone.
But modeling these dynamic parameters to permit reliable forecasts is a fitful, highly inexact task. The data is often flawed or incomplete, the feedback loops are either unknown or improperly modeled, and the time scale is such that out-of-sample verification is a challenge.
More powerful computer capability provides the potential for help in this arena. Complexity theory uses agent-based modeling in an attempt to gain some insights. At best, progress has been painfully slow. The process is to run thousands of simulations using individual agents to make decisions guided by rules that are assigned to each separate agent. The trick is to assign meaningful characteristics to each such agent. That is a nearly impossible task. The hope is that simplifications can still produce insightful tendencies. Economic investment wizards (Bill Sharpe, Harry Markowitz) are currently playing in this field. I suspect that rich outputs are still a long time away.
Models are always simplifications of the things that are being modeled. They are never perfect; they are surely never exact. As Norbert Wiener, the father of Cybernetics, noted “The best model of a cat is a cat”.
But many scientists subscribe to the belief that even a failed model can guide us. It can provide an understanding of what is wrong, and perhaps even how to correct the deficiency. Science is largely a trial and error proposition with error being the far more frequent outcome. The ubiquitous use of simulation computer modeling in the Complex Theory domain helps to speed the discovery process. We remain a long way from home.
I have not fact-checked this submittal. If I have inadvertently made a few typo errors or logic mistakes, please forgive my rush. I have not yet enjoyed my morning coffee.
Forecasting the future is a tough nut indeed. Even morning coffee might not be fuel enough.
Best Wishes.
Absolutely yes. Given any market event, expect a wide range of reactions. In essence, that is what markets are all about.
Your proposed group reaction, as well as those suggested by Catch and Investor, are all plausible actions.
Even in an Efficient Market whereby all relevant information is 100 % distributed to all participants, action plans and decisions will vary dependent upon risk tolerance, financial goals, current wealth status, and investment timeframes. The interpretation of the available information coupled with the diversity in portfolio objectives guarantee a huge array of distinctive responses that are particular to any single investor or an institution. The perturbations are almost endless.
Even Complexity Theory with its multidiscipline scientific staff and unlimited access to supercomputers has failed to make much progress in this arena. These computers explore thousands of random trials using thousands of market participant agents. Some very general insights have been teased from these efforts, but measurable progress is painfully slow with many reservations.
One fundamental issue is the modeling of the individual agents (participants) in the simulations. Faithfully characterizing these agents is an elusive task. All agents do not react in a time or situational consistent manner; real world agents are emotional. As noted, the market players change. We are all exposed to and are influenced by others, some trustworthy, some charlatans. Modeling in this environment is a Herculean ordeal. I’m not sure it can ever be done with acceptable fidelity.
The overall investment world is highly nonlinear with countless feedback loops. Critical thresholds that can not be predicted in advance are violated and group think can be established that devolves into manias and panics. Bifurcation tipping points are frequently violated that are not anticipated and escape any analytical analysis. The future can not be forecasted.
So your group of investors exists, my group and Catch22’s group and Investor’s group all exist, as do a host of others. The precise number of groups and the population within each group remains a mystery. This is one of the mysteries that keeps research outfits like the Santa Fe Institute and others from accurately modeling the complex investment universe. We all keep trying to develop a better understanding however.
This well might be overkill in a sense that it exceeds your current modeling interests, but here is a Link to a Santa Fe research paper that discusses agent modeling:
http://tuvalu.santafe.edu/~jdf/papers/aimr.pdf
Good Luck and Best Wishes.
http://www.au.af.mil/info-ops/iosphere/iosphere_summer06_miller.pdf
The point being that one can pose second, even third order interactions but maybe the causal model, linear or nonlinear transfer be danged, would not even stand up to non-causal, say, neural network type transfer functions between agents. No understanding gleamed but, assuming no singularities, achieving a jump that is illusive. The feedback would be similarly obscure and nothing learned. Perhaps predictive though. Wish I knew enough about the field to guess whether it even makes sense to ask such questions. Already had to consult wikip about arbitrage efficiencies to get through these first few ppgs.
The problem remains that, if you ask people like me that have faced a real world that lends itself to models more readily, I get prejudiced by the need for all empiricism to either lead to simplicity or a universal physical model with understandable, derivable parameters. Seems silly, I know and I really will keep an open mind. By the way, I was surprised at the statement that prior to this agent models weren't used in the field (2001). Is that true? Academics usually are faster than that to make a name with a new idea.
Sorry, just a sleepy old lady recalling buzz from the days of Neanderthals.
(1) In dollar terms (adjusted for currency fluctuation) worldwide mutual fund assets were essentially unchanged at end of Q2 - 2012 from where they stood at end of Q1 - 2010 ($24.7 trillion). However, significant fluctuation (upward and downward) occurred during the 27 intervening months.
(2) Since the beginning of 2011 only one fund group shows an increase in assets, that being bonds. The other three (equities, balanced, money market) all show slight declines. I suspect the stellar performance of this class accounts for some of the increase - in addition to fund flows.
Hi Anna,
I just returned home from my normal weekend tennis match. Truth be told, at the average age of my doubles foursome, the event is more social in character than it is a competitive contest.
I was not altogether surprised by your reaction to the reference I provided. Complexity and Chaos Theory can be a daunting challenge, especially if your background is not rooted in scientific training.
Typically I write as quickly as I can type so my submittals sometimes are not carefully planned and sometimes not well crafted. That was the case when I posted my last reply to you. However, I paused a considerable time when mentally debating if I should include the Santa Fe Institute Complexity Theory reference. Obviously, it was a misjudgment on my part.
Complexity is surely an early evolving scientific discipline. It has both it proponents, and a fair share of opponents. I’m sure some of your confusion on the subject is caused by its strange vocabulary and invented jargon. Even Complexity specialists advocate for a more precise definition of terminology. To us non-specialists, terms like landscape, emerging properties, self-organized criticality, scale-free power law distributions, and automata are perplexing concepts and hamper a quick understanding. Complexity Theory language needs more refinement if it wishes to attract public support .
I was optimistically hoping that if you do not wish to probe more deeply into the Complexity topic that you would have eschewed the reference. It’s always the readers option. I’m happy that you chose to shortstop your review of the Santa Fe document and limit a waste of your energy. That was a prudent action to take.
Complexity Theory is not a mature science by any benchmark. It needs much work. Melanie Mitchell is a Complexity Theory researcher. In her book “Complexity, A Guided Tour” she wrote that the discipline is “waiting for Carnot”. Sadi Carnot was a 19th century physicists who organized the thermodynamics science. Mitchell observes that “Similarly, we are waiting for the right concepts and mathematics to be formulated to describe the many forms of complexity we see in nature”.
That might be a very long wait indeed. Complexity is a real tough nut. After World War II ended, Norbert Wiener created a large following for his emerging Cybernetics discipline. Its extravagant promises were never realized, and now it has a rapidly diminishing cohort. Perhaps that fate awaits Complexity Theory. I hope not. In 1995, science writer John Horgan penned an article titled “Is Complexity a Sham?”. I think not, but its promises remain largely unfulfilled.
You asked about the origins of Complexity Theory. I don’t have recall of a definitive answer to that question, although I do remember that Information Theory inventor Claude Shannon in 1954 and dynamical meteorologist Edward Lorenz in the early 1960s uncovered extreme weather outcome sensitivity to tiny changes in the initial condition input data. His discovery was later called “the butterfly effect” now commonly recognized in the popular scientific literature. Both Shannon and Lorenz were inadvertent contributors to the origins of complexity analyses. Complexity Theory is certainly a modern science that heavily delves into networking phenomena.
If this subject really does tickle your curiosity, I recommend you consider getting a copy of the Duncan Watts 2003 book titled “Six Degrees”. The subtitle of the book is “The Science of a Connected Age”. Although he is associated with the Santa Fe Institute, and holds a Ph.D. in theoretical and applied mechanics (heaven save us), he is an exceptionally gifted author who writes for the general public. He is a super story teller and his published works are very accessible to most everyone.
Before you buy the book, you might want to try a few of his many videos available on the Internet. Here is a Link to one of them called “The Myth of Common Sense”; it is not necessarily the best he offers:
Thank you for reading and replying to my MFO posting. The more we understand this complex, interconnected, networked world, the better investment opportunities will be revealed to us.
Best Wishes.