Since 2008, we have seen an epic fund flow out of domestic equity mutual funds (-$537 billion) into bond funds (+1.09 trillion). This trend has been consistent and unrelenting.
This year after a strong January fund flow of $18 billion into US equity mutual funds, pundits began calling for a “Great Rotation” out of bonds and into equities. This rotation was supposed to drive the next leg of the bull market. While the market indices like the S&P 500 have hit all-time highs, it has nothing to do with the “Great Rotation” because after January, domestic equity funds have had an outflow of $8.4 billion.
According to weekly data estimated by the Investment Company Institute, the liquidation of bonds arrived in a big way after Fed Chairman Ben Bernanke hinted at tapering QE purchases. Over the last 6 weeks, spooked bond investors have aggressively exited funds selling over $74.8 billion in bond mutual funds.
So has this money found its way into US equities? The answer is very little. Only the past week saw a positive inflow of $4.5 billion. So where is all the money going? For one, retail investors are parking it in money market funds. Over the last 6 weeks, money markets have seen an increase of $24 billion. It is likely that individuals that invested in bonds for safety and income do not want to take a risk of throwing their hat into the equity ring with the market trading at all-time highs.
More surprisingly, international equities have been the winner in the “Great Rotation” so far. In the past 6 weeks, international funds received inflows of $11.9 billion. Year to date numbers are even more impressive as they have pulled an inflow of $74.5 billion. This is shocking because international equities have largely underperformed US equities in virtually every time period: year to date, 2 year, 3 year and 5 year results. Despite these flows, Runnymede continues to favor domestic equities over bonds and international equities. The US economy is much stronger structurally relative to Europe and Japan. US corporate profits continue to expand thanks to margin expansion, share buybacks and sales growth while Europe and Japan struggle in recession. If we get the “Great Rotation” into US equities, it will just be gravy on top of higher domestic returns.