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Strategies & Market Trends : VOLTAIRE'S PORCH-MODERATED -- Ignore unavailable to you. Want to Upgrade?

To: Voltaire who wrote (34960)	3/29/2001 3:51:35 PM
From: stockman_scott	Respond to of 65232

Why Fund Flows Are Lousy Market Indicators Thursday March 29, 6:00 am Eastern Time Morningstar.com By Russel Kinnel <<It's amazing what some folks will pin on fund investors. The other day, I heard a television reporter quoting a trader as saying shares of GE (NYSE: GE - news) were hurt by fund outflows. That's amazing. A couple weeks ago $42 billion was shaved off the company's value in one day. However estimates for February outflows stand around $2.4 billion. Say March was five times greater; it still doesn't add up. According to the Investment Company Institute (ICI), stock funds enjoyed inflows of $5.5 billion in November 2000, $11.6 billion in December, and $24.5 billion in January. All this, despite a brutal sell-off last year that resumed in February. These sums are a drop in the bucket when you look at the market cap of the large cap market. How could they possibly be responsible for a big sell-off? They're not. Fund flows have a tiny impact on the market in the short- term. Over time they can add up to something meaningful, but for the most part they're simply another lagging indicator of where the market has already gone. Investors have over $4 trillion in stock funds. If like the people of Whoville, they ever rose up and shouted ``We're here!'' all at once, it would have quite an effect. But, they never do because 83 million people hold that $4 trillion with a huge variety of goals, investment time horizons, and levels of sophistication. The dismal performance of tech-heavy growth funds will no doubt bring greater outflows, but I doubt it will have a big impact on large-cap tech bellwethers. Look what happened to value last year. Value funds drastically underperformed in 1998, 1999, and the beginning of 2000. As a result, they suffered a modest but steady stream of outflows in 1999 and the first half of 2000. Yet despite those outflows, value spiked up in March and put on a great rally no thanks to us fund investors. Last week I chatted with Chip Morris, manager of T. Rowe Price Science and Technology (NA: PRSCX), about how investors in his funds have been holding up in the face of a 61% loss over the trailing twelve months. He said they've been remarkably calm and flows have actually been flat for the year-to-date. ``Fund investors have been fine. It's panicky fund managers who are causing me grief,'' Morris said. There are pockets where fund ownership is big enough and twitchy enough that it does move stock prices. Small-cap stocks, fast growing ones in particular, do seem to be affected by hot money moving in and out of hot funds. As a result, rallies and sell-offs are exaggerated. Still, if you want to know where Cisco's (Nasdaq: CSCO - news) headed, analyze Cisco--not fund flows. The ICI's February numbers will probably come out today or Friday and other firms will be coming out with rough estimates for March about the same time. The long-term trend that results from this bear will be interesting, but it won't be of much help in figuring where the market's headed. Don't Get Me Started About Cash An increase in mutual-fund cash positions has been interpreted as a positive sign because some believe managers are just itching to put it to work. Don't bet on it. Pat Dorsey did a good job debunking that idea back in December.>>