American retail investors continue to shift their portfolio from stocks to bonds

Crazy week for me. I actually went down to a small town in Pennsylvania to buy a used car. Nothing fancy but I wanted a particular car with specific features and it looked like I could save a few thousand so I did it. The trip only took a few days but it felt like I had been gone for a month. I haven't gone on any vaction in several years so that's probably why. Anyway...





Retail investors in America have been shifting their portfolio towards bonds over the last couple years and a Scotia Capital analyst comments that cash held by mutual funds is at multi-decade lows:


...Strategist Hugo Ste-Marie is out with a report Monday that shows what’s known as the liquid asset ratio at U.S. mutual funds - that’s cash holdings in plain English - is at the lowest level seen in decades. Mr. Ste-Marie said that data is “signalling that equity portfolio mangers no longer have cash to redeploy. If new inflows don’t kick in soon, the equity rally will sputter.”

Scotia Capital also took a look at where American investors are putting their savings. Despite last year’s rally, retail investors are steering clear of stocks. Mr. Ste-Marie said: “U.S. equity mutual funds sales declined for a second year in 2009. Money continued to flow out of stock mutual funds last year as withdrawals reached $8.84-billion (U.S.), after the massive $234-billion outflow of 2008.”

“ Although equities performed well last year, retail investors continued to pour money into bond funds, which attracted almost $375-billion in net new cash flow,” said Scotia Capital. “From an asset mix perspective, equity funds account for 47 per cent of total U.S. mutual funds assets compared with 41 per cent in 2008 and a peak of 60 per cent in 2006.”
 
It looks like retail investors have stayed away from the stock market, all throughout the big rally over the last year. If this trend continues, this may signal a permanent change in retail investor sentiment. What was once thought of as a sure bet—stocks—may not be seen as such anymore.


The big question to me is whether pension funds will start shifting their asset mix as well. My view is that they have to. They hold too many illiquid and possibly risky assets—such asssets look great when times are good but are a disaster at other times (it's sort of like investing in microcaps.)

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