The “Great Rotation” is what journalists have begun the call the idea that investors of all stripes–but particularly retail–are starting to reverse the sharp shift in asset allocation away from stocks and into fixed income that they made as the Great Recession unfolded in 2008.

There’s some evidence that a shift of this kind is beginning.  Recent weeks have shown sharp increases in flows into equity mutual funds, although the main winners have been global/international funds and emerging markets funds–not US-only ones.  At the same time, there have been sharp outflows from developed market bonds funds.  At least some of this money has gone into stocks, although most may have been reallocated into emerging markets bond funds.

I have some reservations, though:

–Yes, the flows have been unusually large.  But until we see more data it’s hard to know whether these are beginning-of-the-year adjustments that will disappear come February, or whether they’re a more enduring trend.

–More important for us as equity investors, it’s not clear that shifts like this are good for stock market performance.  Intuitively, you’d think they should be, but historically they’re not.

Fidelity, for example, released a study more than a decade ago about investor experience in one of its flagship funds.  The results were that the fund itself had made, say, a 100% gain over a ten-year period.  The average investor in the fund, in contrast, had a gain of only, say, 30%.  Why the difference?  People were always selling at low points for fund net asset value (when they were afraid) and buying at high points (when they were feeling good and when the fund had already been showing strong returns for  while).

I’d been working for about a year for a load fund organization trying, unsuccessfully to that point, to improve the performance of a chronically underperforming portfolio (it subsequently did really well, and for a long time).  A very successful broker came up to me at a sales meeting and told me he’d just put a large amount of his clients’ money into my fund.  When I thanked him, he asked me if I wanted to know why he’d done this.  With some trepidation, I said yes.  He told me he looked for competent managers whose portfolios were underperforming and who were generally unloved.  His exit signals?   …a sustained period of outperformance, followed by strong inflows of cash.  The clincher for him was if the organization began a sales campaign touting the fund.

Colleagues at other organizations have told me basically the same thing–they found it’s always time to become defensive if they start seeing large cash inflows.

Look at the past four years.  Despite continual cash outflows from the US market, the S&P has more than doubled from the early 2009 lows.

–a rotation out of bonds, in my view, will only start when interest rates begin to rise–and bond investors begin to experience losses. My guess is that this is a least a year off.  During periods like this in the past, stocks have been flat to up.  Rising interest rates are a negative for stocks, too.  But rates can rise only if the economy is healthy enough to be producing increasing corporate profits, which act as a stabilizing influence on equities.