Is High Yield Flow Data Pointing Toward Lower Equities?
Fund flow data for the
week ended May 21 shows that equity funds saw an increase in allocations by
investors, while bond funds continue to benefit from investor demand.
However, for the first time since the start of the Iraq war, the riskier
high yield bond funds experienced outflows. Does this increase in risk aversion
signal that the three month equity rally is over?
Equities
Investors allocated $500.6 million to stock funds
this past week. Most of the inflows went into aggressive growth ($766.7 million)
and large cap growth ($644 million). Conversely, international equity funds,
which included emerging market and developed country stock funds, saw over of $1
billion in redemptions. Year to date, $11.8 billion has flowed in to equity
funds, which is chump change when one considers that the figure was $62 billion
during the same time period last year.
Fixed Income
For the week ended May 21, taxable bond funds
took in $1.5 billion from investors. Most of the this money went into investment
grade corporate and international bond funds. But for the first time since Feb
19 (the start of the Iraq war) money flowed out of high yield bond funds–to the
tune of $257 million. Also, high yield bonds experienced their first negative
week in over three months, closing down .28% for the period. Elsewhere in bond
land, municipal bond funds reported $678.9 million of inflows, which was the
groups largest gain since August of last year.
The increased risk aversion displayed by
investors this week, through selling high yield bond holdings and emerging
market stock funds, can be attributed to the terrorist attacks, heightened
alerts and mad cow disease that understandably dominated the headlines for the
better part of the week. In my opinion, this week’s change in investor sentiment
is just a temporary blip in the gradual recovery in investor sentiment that
we’ve been seeing. Once these geo-political factors that have been affecting
certain risk sensitive markets subside, the positive trend should continue. Al
Qaeda’s actions in the Gulf and Northern Africa indicate that theÂ
terrorist organization is running out of targets in the West and is now
attacking innocents in countries where security measures have been less
stringent. The likelihood over an attack in the US, although not impossible, has
been reduced substantially since 9/11. The Mad Cow Disease incident in Canada,
too, should blow over in the weeks ahead, as the probability of widespread
contamination is now regarded as minimal (witness McDonalds share prices have
already recouped some of their losses).  Nevertheless, I will
be closely monitoring investor flows in the weeks ahead to determine weather or
not this week’s behavior by investors is temporary or a sign of change to come.