The big investment buzz a year ago was the so-called “Great Rotation,” an expected shift out of bonds and into equities. In response, we devoted our January 2013 commentary to mutual fund flows, and while we were unsure whether the phenomenon would become a trend, we were clear that we saw the possibility as “a return to familiar ground.” That is, from 2008-2012, investors changed their traditional patterns of behavior, evidently in reaction to the sharp equity losses in the 2007-2009 bear market. Last year, we wrote:
In order of magnitude, the three shifts we have seen lately have been a massive preference for bonds over stocks, a huge swing from actively managed equity portfolios to passive ones and a much greater fondness for funds with stellar short-term performance.
Dov Gertzulin's DG Capital has had a rough start to the year. According to a copy of the firm's second-quarter investor update, which highlights the performance figures for its two main strategies, the flagship value strategy and the concentrated strategy, during the first half of 2022, both funds have underperformed their benchmarks this year. The Read More
We thought this trend an overreaction for the most part and in some cases a “severe case of performance chasing.” A year later, we believe it is an opportune time to revisit the issue and report good news: Investor behavior has largely returned to form.
Heading into 2013, we had seen five years of huge bond inflows (averaging nearly $200 billion annually) and big U.S. stock outflows (averaging $60 billion per year). Traditionally, of course, both tend to have inflows. We did see something of a rotation, but not a complete one, in 2013. Specifically, inflows to domestic equity funds totaled $60 billion, while investors added just short of $150 billion to international funds. Indeed, investors did absolutely dump one type of fixed-income fund, with municipal bond funds losing nearly $58 billion in assets. (For perspective, in the nine preceding years, muni-bond inflows averaged about $19 billion annually.) Investors did not shed taxable bonds en masse, however; inflows to that group of funds totaled $22 billion, which still represents an inflow, but a 90% reduction in size. Overall, this behavior seems rational to us. We believe the long-term returns of equities should surpass that of bonds, especially in the current environment, so higher flows to stocks is smart from our perspective. By the same token, if investors are building assets toward long-term goals, setting a reason