the data

EFPR Global, a data service based in Cambridge, Massachusetts, reported yesterday that investors around the world poured over $15 billion into the equity funds it watches during the week ending November 10th.  This makes the period the best for equity fund inflows since the first half of 2008–before the collapse of Lehman.

According to EFPR, investors put money into virtually all types of equity funds–US, Europe, commodity sector, global and emerging markets.

Bond funds continue to gain assets, but investor enthusiasm for sovereign debt of the US and the EU has clearly begun to wane.

Just published data from the Investment Company Institute, the trade organization for US-based fund companies, only cover flows through November 3rd.  But they confirm a lot of what EFPR is saying.  The ICI numbers show a slowdown in inflows to bond funds, as well as continuing support for equity funds focused on non-US markets.  But the best the ICI can say for US-oriented equity funds is that net redemptions have slowed down.

what to make of this

It’s tempting to say that the “dumb money” that continued to withdraw money from stocks while they were on their way to nearly doubling is now starting to buy back in at much higher prices.  On the idea that “dumb money” stays dumb, this would be a sign that equity markets are near a peak.  IN other words, we should look at the inflows as a contrary signal.

This was my first reaction.  But I’m not sure it’s the right reading of the situation.

In my opinion, there are two reasons for the change in behavior:

1.  I think investors are concluding that layoffs at their firms have ended and that corporate profits are improving.  Therefore their present jobs are secure.  As a result, they won’t need their savings any time soon.  This means they can, at least with new money–if not with investments they already hold–take a more aggressive posture.

Put another way, for most individuals their human capital–their ability to do economically useful work–is their greatest asset.  When the income flow from work is uncertain, it’s no time to take on even more risk with investment capital.  And vice versa.

2.  To some extent, the large amount of publicity about QE II has underlined how little scope there is for government policy to depress interest rates further.  So quantitative easing may be a signal for bond investors to take some profits out of bonds and put them somewhere else.

You might say that this is giving more credit to individuals for having investment savvy than they are due.  On the other hand, we know hedge fund managers are on their way to underperforming the S&P for the eighth year in a row.  And traditional long-only professionals typically end up deep in the top quartile just for matching their indices.  So who’s left as the winners of the investing game?  Brokers and individuals.

Even if you think what I’m saying is crazy, there is still a huge amount of individual money on the sidelines that I think will eventually be pulled into the stock market.  So two or three weeks of positive money flow is at worst a signal for greater attention to the behavior of individuals, not for becoming ultra-defensive.