Equities Are Out of Favor, Bonds Are In: Fund Flow Data



No takers for equities

In Parts 4 and 5 of this series, we explored why Richard Bernstein believes investors are exceedingly risk-averse. This is contrary to the general belief that currently investors are actually aggressive. To further prove his point, Bernstein pointed to fund flow data. The graph below contains data pertaining just to mutual funds.

The graph makes it clear that equity mutual funds (AMCPX) have been out of favor for quite some time and in a sizable manner. At the same time, bond mutual funds, except for 2015, have been in favor.

In his Insights newsletter for July, Bernstein used combined data for mutual funds and ETFs from December 2014 to June 2016. According to the data, US equity funds (VIGRX) (SPY) have seen outflows to the tune of ~$176 billion in this period. In the same period, bond funds (WHOSX) (AGG) (BNDX) have seen inflows worth the same quantum as equity fund outflows. This points to the fact that equities are out of favor.

Valuations are normal

Bernstein noted that some investors believe US stocks (IVW) are overvalued because PE (price-to-earnings) ratios are high compared to the past. But it’s important to note that standing alone, PE ratios haven’t proved to be accurate forecasters of future returns.

Bernstein says that a rigorous analysis of inflation and PE ratios shows that equities are, at worst, fairly valued. To provide perspective, he showed that inflation was rising as the Markets entered a bear phase in 2008. Presently, inflation remains low compared to 2008 levels.

Bernstein’s advice

Bernstein is quite surprised by the risk-averse behavior of investors at a time when, according to him, the corporate profit cycle has started to turn in the United States. Coupled with low inflation and even with high PE ratios, his firm advocates equities for those investors who have “multi-quarter time horizons.”

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