Signs of a Secular Rotation? Not Yet

April 27th, 2013 by Tom Roseen

Announcements of a secular rotation out of fixed income funds into equity funds are perhaps premature. Yet there is no denying we have seen renewed interest by fund investors in equity funds. Year to date through Wednesday, April 24, equity investors have injected a net $117.8 billion into fund coffers (including conventional funds and exchange-traded funds [ETFs]). However, the money appears to be new money entering the market; during the period investors have continued to pad the coffers of fixed income funds as well, injecting some $108.3 billion into taxable bond funds. Only money market funds (-$122.2 billion) have seen net redemptions.

Prior to this recent equity rally (the Dow was up 12.00% year to date through April 24, 2013), retail mutual fund investors shrugged off the strong relative performance of equity mutual funds for 2009 (+33.73%), 2010 (+16.57%), and 2012 (+12.54%) and, heeding the gloom and doom of the naysayers, became primarily fixed income fund investors. From the beginning of the financial crisis in late 2007 until the end of 2012, retail investors injected slightly less than $1 trillion (+$965.9 billion) into taxable bond funds (ex-ETFs), while being net redeemers of equity funds (ex-ETFs) to the tune of $430.8 billion.

Source: Lipper, a Thomson Reuters company

Source: Lipper, a Thomson Reuters company

Not surprising but somewhat confounding given the timing, with the recent strong market performance (the Dow hit a record high—closing at 14,865.14—on April 11) and with many of the 2012 year-end uncertainties off the table, many mutual fund investors have turned their attention back to equity funds. (Let’s hope this is not a contrarian indicator and a call to the top of the market!) Investors have injected some $91.8 billion into conventional equity mutual funds so far in 2013 (through Wednesday, April 24), while still padding the coffers of conventional taxable fixed income funds to the tune of $93.7 billion.

So, while the last approximately sixteen weeks of net fund inflows into both fixed income funds and equity funds cause us to question announcements of a great rotation into equity funds, we’re not saying the rotation won’t occur—just that it hasn’t happened yet.

* This article originally appeared in the March 11 issue of Ignites “Your Q&A”