Chart of the Day – For My Long-Term File.

I was going through the piles of equity research on my desk – most of it garbage by the way – and I unearthed this chart courtesy of Scotiabank.  This chart will certainly be placed in my ‘Long Term File’! (See blogs “US Energy Self-sufficiency – Big Game Changer for Investors” and “What other things are in my long-term file?”)

This chart sums up what has been going on in terms of mutual fund investment flows since the S&P 500 bottomed in and around March 9, 2009.  Amazing.

Source: Scotiabank

Source: Scotiabank

I do like secular (long-term) themes.  As bond mutual funds start to produce negative rates of return in 2013 we are seeing evidence of a reversal in investment flows from bond funds to the positive rates of return of US equity mutual funds as investors seek higher rates of return.  As you can see from this chart we are in the earliest of days in terms of a secular shift from bonds to equities.  As this shift gathers strength this flow of funds reversal will place a floor under the US equity markets for the foreseeable future.

US individual and institutional investors hate equities.  I get it!  Two crashes in eight years.  This investment flow chart proves people have given up on this asset class and perhaps vowed to never return.  History can be a guide in this instance.  As equity rates of return over the last three to five years start to look better market participants will follow (chase) returns as market valuations go ever higher, paradoxically exposing investors to more risk.  Sadly, nothing ever changes with human nature and financial markets.

A wise man told me early in my career the investing public, including institutional investors, invest in asset categories that have performed well over the last five years thinking the asset class will enjoy the same performance over the next 5.  Fixed income, and related asset classes such as REITs and utilities, has performed well over the last 5 years with investment dollars following performance, again as the above chart shows.  Can this performance and funds flow continue?  With a modest increase in interest rates in the US, negative rates of return are starting to appear in the monthly investment statements of individual investors for the first half of 2013.  What will be the result? Apathy or action.

As always will be fun to watch.

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