Fund flows drive markets, and they suggest many months of misery.

Having (with partners) founded and managed a mutual fund company, I can share some insights when it comes to timing markets.  Some say it’s impossible, but the data (and experience) suggest otherwise.

For instance, just before the COVID-19 mayhem which ignited the mess we’re in, inflows into mutual funds were their highest in three years – in February.  The propensity for retail investors to invest in funds is inversely related to the prospects for markets.  In other words, when investors are most enthusiastic, something bad is about to happen.

Mutual Fund Flows

You might argue that nobody saw the coronavirus coming and I’d not argue.  In reality, we never see what’s coming.  All I can say with gusto is that this works.  It takes time for a crisis (whatever the cause) to influence behavior, and hopes for a rapid recovery are almost always disappointed.  The best indicator of expectations and behavior is hard evidence, which fund flows provide.  In a nutshell, money won’t begin to find it’s way back into markets (thereby driving valuations higher again) until all the money that can leave has left the markets.  The following quote is from a BMO report called the Mutual Fund Observer about the last crisis:

For the most part, it took the asset managers between 7 and 11 quarters for retail AUM to return to pre-financial crisis levels. Retail net flows took even longer than AUM to rebound post-crisis, with some asset managers never reaching their pre-crisis flows high.

The first leg of a recovery begins at the bottom, and we’ve no idea yet when that bottom will occur.  (I’m humming the tune “We’ve only just begun” in my head as I type this).  This quarter and probably the next, we’re still on the down leg.  Once redemptions accelerate, the providers of mutual funds (banks and larger fund companies) will begin to fire their sales reps, portfolio managers (insane but theirs no surplus of sanity in big organizations); consolidate funds and once again be unprepared for the recovery when it comes.  You want to own stocks again when hopelessness is the new norm and talk of ‘recovery’ is no more.

Bear Markets


About Mal Spooner

Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He authored A Maverick Investor's Guidebook which blends his experience touring across the heartland in the United States with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources which he authored with Pamela Clark — predicted the resources boom back in early 2004.
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4 Responses to Fund flows drive markets, and they suggest many months of misery.

  1. Bull Beta says:

    Do you believe it is going to be a V recvery or it could last more than a year?

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