By Ryan Barnes
Release Date: Monthly, about four weeks after month\'s end
Release Time: During market hours
Coverage: Stock, bond and money market funds
Released By: Investment Company Institute (ICI)
Latest Release: http://www.ici.org/stats/index.html

Background
Dollar flows into and out of mutual funds is a modern-day indicator, one based on sentiment but still useful to the wise investor. The Investment Company Institute (ICI) is the most reliable source of mutual fund trends, publishing a monthly report covering domestic and international stock funds, bond funds and even money markets. The ICI is a non-profit organization whose members are the majority of investment companies registered with the Securities and Exchange Commission (SEC). The organization has reported before Congress and presents free information for investors and economists by sampling more than 8,000 mutual funds, closed-end funds, exchange-traded funds (ETFs) and unit investment trusts (UITs).

The Federal Reserve also issues money market figures in its Money Supply Report, and TrimTabs offers daily and weekly data to investors through its website.

Most often, mutual fund flows are presented as the net of all inflows and outflows measured over the period; if total dollars going in is the same as dollars being sold out, total flows over the period will be $0. In the monthly ICI report, new sales, redemptions and exchanges are netted out to show a "net new cash flow" figure, which can be positive or negative for a given period. Average cash levels at stock funds are also shown in the report

What it Means for Investors
Stocks and bonds respond to changes in demand like any other investment, and knowing what the prevailing investing trends are can help investors to decide whether the present time is a good one to invest in one asset class or another. While mutual fund flows alone do not determine investor sentiment (institutional money and individual shareholders are excluded in the ICI report), they do represent the way most investors participate in the markets - mutual fund assets in the United States alone stood at more than $10 trillion at the end of 2006.

That said, strong flows into stock mutual funds does not guarantee good times ahead for equity investors. Some economists even see fund flows as a "false positive", or contrarian indicator, with the logic being that most people commit more money to the stock market when it has already run up, and has received a lot of positive press and mainstream coverage. A recent and powerful example can be seen in the last few months of the stock market peak back in early 2000. Stock market flows were at record levels those first few months; soon after, the stock market began a steady march downward, with major indexes dropping more than 50% in the next year.




If the market is coming out of a recession or other weak period, seeing fund flows grow in stock funds can be a positive indicator, suggesting that investors are increasing their allocations for stocks. When mutual fund managers have more cash coming in, they have to go out and purchase stocks on the open market to keep their portfolio percentages in the right proportions.


Money market fund flows can be read in a similar way, with increasing flows being seen as a sign that stocks may be undervalued, and vice versa. (To learn more, read Money Market Mutual Funds.)

Strengths:
  • Valuable source of investor sentiment
  • Information available for other countries; ICI even provides a "worldwide" figure
  • Valuable for seeing fund manager sentiment through average cash levels (considered a defensive asset class)
Weaknesses:
  • Can be interpreted in different ways (such as a contrarian indicator)
  • Does not show total market ownership - only mutual funds
  • Difficult to separate secular trends in fund ownership from market timing situations month to month

The Closing Line
Fund flows may be seen as esoteric, but smart investors should consider adding this to their arsenal of indicators to know and study, understanding that stock and bond markets have supply and demand patterns that may be distinct from economic activity.


Next: Economic Indicators: Non-Manufacturing Report »



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