In 19 of the 20 months spanning May 2011 through December 2012, investors pulled money out of equity mutual funds totaling more than $320 billion dollars. In 19 of those same 20 months, investors poured more than $393 billion into bond mutual funds. So what followed in 2013? As we have seen, most major stock indices recorded solid gains, while bond indices took losses.
Now that the S&P 500 is back in the news for its recent performance, and bond prices have been falling, investors appear to be shifting gears. The ICI data show net inflows for equity funds in every month of 2013 amounting to almost $169 billion. Meanwhile, inflows into bond funds steadily dwindled during the first five months of 2013, and have turned to outflows of $176 billion in the seven months since.
Bonds provide current income and can be a counterbalance to other investments in a portfolio, yet how many investors for whom some allocation to bonds would be appropriate are turning away from them now because of their recent slide? It’s possible, of course, that the massive flows out of bond funds simply reflect some coincidentally synchronized change in the personal financial circumstances of a huge number of investors. Maybe lots of people got a big raise, or inheritances, or don’t need as much income from their investments now as they did at this time last year. More likely, we think, is that investors have changed their “risk tolerance” in the face of the stock market’s well-publicized gains. The 57 percent plunge in the S&P 500 a few years ago may have faded a bit from memory, and the role bonds can play in offsetting stock market volatility in a balanced portfolio may seem less important now that stock indices are hitting new highs. A stock market correction that brings with it a flight to quality may leave today’s sellers wishing they had held on to their bonds a bit longer – or even added to their lagging fixed-income holdings.
Just because the S&P 500 enjoyed solid gains in 2013 and has more than doubled since its low in March 2009, doesn’t mean it can’t keep right on rolling higher in 2014. Still, signs of overly optimistic investor sentiment are increasing just as good values in the stock market seem to be getting harder to find. Markets can and do correct, sometimes suddenly, and investors who drift too far from their plan may get a painful reminder of what their risk profile really is.
Our goal for 2014 is to provide our clients with the investment experience they need to keep their plans on track. As we start the new year, we resolve to follow our disciplined investment process with every managed portfolio – and that’s a resolution we’ve carved in stone.
Gary E. Stroik is vice president, chief investment officer and lead portfolio manager, of WBI Funds. Stroik joined WBI Investments Inc. (then known as Wealth Builders) in February 1990, serving as vice president, chief investment officer and chief compliance officer. He received a B.A. in Honors English and Fine Arts from Georgetown University in 1976.