advertisement
Looking for answers about where the market is headed? Don't bother with mutual fund data.
It would be nice if those data could tell us whether a tidal wave of new money was going to hit Wall Street or whether jittery investors were about to pull out their money, but it doesn't work that way.
The most commonly cited data from mutual funds I see being used to get a sense of where the market is headed are funds' net inflows and their cash positions. Unfortunately, the first gauge is a lagging indicator, and the second hardly ever changes.
Is there a cash hoard?
There have been some reports that money managers have built up cash and that they are waiting to invest it at lower prices. That may well be true somewhere, but it isn't in the mutual fund world.- Top Stocks blog: Find expert analysis of trends that are moving markets
Once upon a time, mutual funds were run as if they were an investor's only holding. Some managers liked to try to time the market by building cash when the market was overpriced and investing it when things looked better.
That's not how things work now. Most fund companies and many investors expect their managers to be fully invested.
More from MSN Money and Morningstar
At Fidelity, managers look at a fund's history of sales and redemptions, its asset size and its volatility to estimate a likely range of possible inflows and outflows. The fund then targets a cash range that can accommodate that -- commonly 3% or 4%.
Other fund shops aren't quite that strict, but it's pretty rare to see managers making double-digit moves into cash.
I've seen some reports about heightened cash positions in funds, but that's a little misleading. There are a number of funds that invest in futures or other derivatives and hold cash against those contracts. In that case, the cash isn't free to be invested when the manager feels bullish -- it already is invested.
Video on MSN Money
Has the market turned a corner?Morningstar's Pat Dorsey and Paul Larson see some positive signs -- and opportunities.
To see what the typical U.S. stock fund's cash position is, I screened out balanced funds, long-short funds and funds from fund companies that tend to hold derivatives and thus make the cash stake misleading (Pimco, Profunds, Rydex and Direxion). Adjusted that way, cash is just 3.7%. That's fine for meeting redemptions, but it isn't exactly a hoard waiting to buoy the market.
One downside of staying fully invested is that a manager might have to make more flow-driven trades, and that can be pretty costly. As a result, some funds use exchange-traded funds (ETFs) to gain market exposure in a very liquid, way so they can sell or buy more to meet cash while staying fully invested.
Continued: A fund should pass two tests
Rate this Article
High
