As the market sails to new highs, the dam has finally broken.
Money is pouring like crazy into stocks, which is of course classic investor psychology. Nobody buys low. People like to buy high.
In Goldman Sachs’ latest “Weekly Kickstart” note, strategist David Kostin relays the discussion the firm is having with clients. It’s all about these retail fund flows into equities.
The 5% S&P 500 pullback in June did not derail strong flows into equities although the recent focus on Fed policy and potential for QE tapering has overshadowed an important shift in flows that appears to favour retail sponsorship of equities. Retail equity sponsorship is inflecting higher. This week the Goldman Sachs Rotation Index reached its highest point since late 2008, indicating that retail mutual fund flows have a higher risk appetite and bias towards equity funds.
The drivers of that shift have been $50 bn of outflows from taxable bond mutual funds and ETFs and $30 bn of flows into domestic equity funds since the start of June. During 2Q $28 bn of assets flowed into domestic equity funds vs. $27 bn into taxable bond funds. Those flows reflect strong relative outperformance of stocks versus bonds as the 10-year US Treasury bond posted its third straight quarter of negative total returns in 2Q. The Treasury has lagged the S&P 500 by 20% in 2013, and through June the S&P 500 information ratio is on pace for a 78th percentile performance since 1962.
Retail equity allocation is now overweight vs. its 20-year average of 68.4%. The mix of retail flows continues to rebalance the mutual fund asset allocation. We estimate retail investors have 69% of assets in equity funds, which is 70 bp above average since 1992 and up from 65% in 2012. Within that equity allocation a structural shift in favour of international funds is clear while bond holdings show an overweight in investment grade corporate vs. underweight in municipal bond funds.
This chart from the note is Goldman’s own “Rotation Index” which looks at relative stock-vs-fixed income fund flows. As you can see, the rotation into stocks is surging like mad in recent weeks.
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