Beating The Dead Mutual Fund Horse

Every week there are mounds of articles about how retail investors are bearish because of the outflows from equity mutual funds. When was the last time you heard anybody who wanted to invest looking at equity mutual funds? Fifteen  years ago institutions and retail investors alike flocked to equity mutual funds. A number of shifts have made investors look elsewhere when investing money.

Technology in the form of indexing, ETFs and cheap online trading have made mutual fund investing less attractive. Data showing that indexing consistently beats mutual funds is widely known. On the institutional side alternative investments such as hedge funds have provided even more competition for mutual funds. Some investment advisers push mutual funds because of the fees they receive but other than that mutual fund investing is in decline.

Bond mutual funds have held up well because it is much tougher for retail investors to buy bonds. The bond market is still a dealer market and bonds rarely come in bite sizes. Add to that the declining risk profile of aging baby boomers and the increase in assets in bond mutual funds makes a lot more sense.

The resounding bullishness in the individual investor sentiment survey, the meteoric rise in margin borrowing and the increase in option trading are probably a better gauge of retail investor sentiment than mutual fund flows.

9 comments:

Anonymous said...

disagree. then why don't investors just use bond etf's via equities market. that logic doesn't stick.

when was the last time people were in equity mutual funds and pulling out.. (NOW!)and... moving into?? bond funds!

lest not forget, mutual funds are still trillion dollar biz and still a big playa in the market and reflective of the herd... and not the street or the savvy investor community.

Tsachy Mishal said...

Indexing does not work as well with bonds. There are hundreds of thousands of different bonds. There is not enough liquidity in each issue to index.

Tsachy Mishal said...

There is also the issue of those who would go to , money market accounts, bank deposits or CDs but because of 0% interest rates are being forced into bond funds.

Tsachy Mishal said...

I wanted to elaborate on what I meant by hundreds of thousands of different bonds. One company can have 20 different bond issues and with financial companies it can be even more. Many of these bonds don't trade for weeks or months at a time.

The US government has thousands of different bonds outstanding. While the liquidity may be great on the just issued bonds, its not as great on older issues. Although it is much better than corporate bond liquidity.

Anonymous said...

i agree with your points, but the herd dictates tops and bottoms. not the street. and the herd is still symbolized by the 401k fund family.

Anonymous said...

You ned to remove yourself from your day to day crowd and think like Joe6pack. He knows little about the market. Or stocks. He has no passion nor time. He buys a few funds in his 401k and maybe on a tip from a friend.

You are thinking like a sophisticated stock jockey or someone in nyc and is surrounded by the lifestyle of wall street. It is just not like that in 95% of america outside the small sliver of ameritrade etrade et al investors which number about 1 to 1.5 million. In a country with 200M+ adults it is peanuts. The dollars in mutual funds still dwarfs the 1T in ets...much of that etf money is hedge funds darting in and out from 1 to another. Not Joe 6pack

Tsachy Mishal said...

Ten years ago I knew a lot of people who invested through open end equity mutual funds. I still know people who hold them but nobody who buys them. Unless they are forced to based on insurance policy or other environments where no other choices are given.

Anonymous said...

Joe6pack was never buying mutual funds. Upper middle class people were.

Anonymous said...

Mutual funds are probaly a good buy right now, since nobody wants to buy them.