Mutual fund flows have, or the absence thereof, have drawn some recent attention as related

to the price movement in the domestic equity market. The following analysis looks at this
topic in addition to some other useful observations including seasonality, historical net new
cash inflows, taxable bond funds, corporate spreads, and treasuries.

The following graph displays the seasonality in total equity mutual fund flows. January, April,
and November appear to be key months for “money on the sidelines”. However, isn’t there a
seller for every buyer?

Total Equity Mutual Funds

Average Net New Cash Inflows
January 1998- Current
Source Data: Investment Company Institute
$25,000

$20,000

$ $15,000

M
i
l
$10,000
l
i
o
n
s $5,000

$0

($5,000)
January February March April May June July August September October November December

Average Net New Cash Inflow

The cumulative outflows in 2008 of $233.8 billion were close to 10x that of the 2002
experience, $26 billion. Yes, the economic conditions were different, but it puts the
magnitude of the selling in context.

Cumulative Net New Cash Inflow

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
1 January $14,688 $17,123 $40,914 $25,064 $20,048 ($371) $42,981 $9,965 $31,576 $29,205 ($44,418) $9,201 $0
2 February $38,861 $17,835 $94,596 $21,766 $25,452 ($11,465) $69,195 $32,145 $58,924 $55,490 ($35,220) ($15,747) $0
3 March $61,803 $30,438 $133,988 $1,194 $55,079 ($11,741) $85,167 $47,288 $93,287 $63,687 ($45,147) ($41,209) $0
4 April $88,303 $56,276 $168,013 $20,406 $68,005 $4,365 $108,125 $55,920 $119,607 $81,840 ($33,074) ($29,111) $0
5 May $107,626 $71,238 $185,050 $38,533 $72,880 $16,293 $108,556 $67,130 $122,768 $80,757 ($18,307) ($10,566) $0
6 June $126,836 $90,343 $207,192 $49,348 $54,601 $34,925 $118,953 $73,288 $114,167 $85,056 ($22,613) $1,774 $0
7 July $146,363 $102,744 $224,534 $48,117 $1,993 $56,373 $128,321 $83,240 $114,905 $96,267 ($49,815) $11,543 $0
8 August $134,643 $111,653 $248,544 $43,301 ($1,070) $79,770 $129,481 $89,592 $119,967 $80,706 ($69,459) $15,906 $0
9 September $140,959 $122,445 $265,878 $13,948 ($17,165) $97,025 $139,699 $97,515 $126,562 $88,359 ($120,541) $5,741 $0
10 October $143,425 $143,484 $285,041 $14,871 ($24,667) $122,331 $146,902 $103,967 $139,290 $99,286 ($192,859) ($1,349) $0
11 November $156,176 $162,502 $290,565 $30,168 ($17,714) $137,261 $168,308 $124,987 $150,069 $89,341 ($213,510) ($4,127) $0
12 December $159,371 $187,481 $302,205 $33,089 ($26,015) $151,439 $178,554 $134,807 $160,145 $90,639 ($233,822) ($4,127) $0

The following graph(s) displays the relationship between cumulative new inflows and the price
of the SP 500 for 2008 and 2009. A couple of telling observations: 1. From May 2008 to
November 2008, the SP 500 declined 36.0% on outflows of $195.2B, 2. From March 2009 to
November 2009, the SP 500 rose 37.3% on inflows of $37.1B. The SP 500 had an equal-
percentage rise in price on 19% of the cash-flow. Perhaps the best adjectives to describe this
phenomenon include “street-driven-affair” and “courtesy of the taxpayer” however, “broad
participation” and “on behalf of the taxpayer” are not appropriate.
 Total Equity Mutual Fund Net New Cash v SP 500
2008
Source Data: Investment Company Institute
$0

1450

($50,000)
1350

$
1250
M ($100,000)
i P
r
l
i
l
1150 c
i
e
o ($150,000)
n
s
1050

($200,000)
950

($250,000) 850
01/01/08 02/01/08 03/01/08 04/01/08 05/01/08 06/01/08 07/01/08 08/01/08 09/01/08 10/01/08 11/01/08 12/01/08

2008 SP 500

Total Equity Mutual Fund Net New Cash v SP 500

YTD November 2009
Source Data: Investment Company Institute
$20,000 1200

1150
$10,000

1100

$0
1050
$

M 1000
($10,000) P
i
r
l
950 i
l
c
i
($20,000) e
o 900
n
s
850
($30,000)

800

($40,000)
750

($50,000) 700
01/01/09 02/01/09 03/01/09 04/01/09 05/01/09 06/01/09 07/01/09 08/01/09 09/01/09 10/01/09 11/01/09 12/01/09

2009 SP 500
Taxable bond funds have some interesting seasonality as well. This does a good job of
explaining the price action of December 2009. Perhaps the seasonality follows the timing of
coupon payments?

Taxable Bond Mutual Funds

Average Net New Cash Inflows
January 1998- Current
Source Data: Investment Company Institute
$8,000

$7,000

$6,000

$
$5,000
M
i
l
$4,000
l
i
o
n $3,000
s

$2,000

$1,000

$0
January February March April May June July August September October November December

Average Net New Cash Inflow

The 2009 cumulative inflows into taxable bond mutual funds were simply staggering by
historical standards. However, in the context of $1.5 trillion funding needs, this equates to
only 19%.
Cumulative Net New Cash Inflow
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
1 January $7,232 $6,361 ($8,487) $7,511 $9,006 $12,801 ($103) $3,764 $6,232 $12,274 $20,021 $12,673 $0
2 February $12,901 $9,708 ($13,968) $14,451 $17,397 $30,726 $823 $5,607 $12,099 $24,209 $32,348 $25,181 $0
3 March $18,440 $14,355 ($19,234) $21,290 $24,218 $41,356 $8,387 $4,631 $16,114 $35,929 $38,298 $41,611 $0
4 April $22,103 $16,422 ($22,920) $23,839 $31,216 $52,231 $3,996 $6,408 $17,318 $48,155 $51,305 $64,935 $0
5 May $28,367 $14,836 ($26,452) $28,963 $40,284 $59,849 ($7,232) $9,222 $14,421 $65,875 $63,337 $90,139 $0
6 June $31,840 $16,517 ($24,785) $30,539 $50,701 $64,921 ($11,506) $12,130 $13,776 $72,870 $65,234 $113,699 $0
7 July $37,694 $17,983 ($26,396) $37,548 $75,035 $56,141 ($11,380) $17,708 $16,646 $76,613 $64,626 $141,691 $0
8 August $40,988 $18,446 ($27,699) $51,281 $88,665 $46,390 ($6,814) $23,563 $21,843 $73,746 $69,857 $175,683 $0
9 September $45,603 $16,471 ($29,362) $59,281 $101,786 $41,954 ($4,074) $26,360 $25,084 $79,652 $68,826 $213,142 $0
10 October $50,394 $14,500 ($31,938) $70,890 $109,763 $41,699 ($508) $26,324 $33,257 $90,350 $36,044 $253,274 $0
11 November $56,938 $13,104 ($32,584) $76,888 $117,586 $40,219 $1,497 $26,730 $38,017 $93,464 $22,351 $284,537 $0
12 December $59,082 $6,845 ($33,539) $75,919 $124,206 $38,283 $3,236 $25,110 $45,447 $97,318 $19,274 $284,537 $0

The marginal effect on 5-year treasury yields appears to have dissipated in 2009 relative to
2008.

Taxable Bond Mutual Fund Net New Cash v 5-Year UST

2008
Source Data: Investment Company Institute, Federal Reserve
$80,000 4.00

$70,000
3.50

$60,000

$ 3.00
$50,000
M
i Y
i
l
$40,000 2.50 e
l
l
i
d
o
n $30,000
s 2.00

$20,000

1.50
$10,000

$0 1.00
1/1/2008 2/1/2008 3/1/2008 4/1/2008 5/1/2008 6/1/2008 7/1/2008 8/1/2008 9/1/2008 10/1/2008 11/1/2008 12/1/2008

2008 Average 5-Yr Yield

 Taxable Bond Mutual Fund Net New Cash v 5-Year UST
YTD November 2009
Source Data: Investment Company Institute, Federal Reserve
$300,000

2.90

$250,000
2.70

$ $200,000 2.50

M
i Y
2.30 i
l
$150,000 e
l
l
i
d
o 2.10
n
s $100,000

1.90

$50,000
1.70

$0 1.50
1/1/2009 2/1/2009 3/1/2009 4/1/2009 5/1/2009 6/1/2009 7/1/2009 8/1/2009 9/1/2009 10/1/2009 11/1/2009 12/1/2009

2009 Average 5-Yr Yield

The effect on spreads appears to have dissipated as well.

Taxable Bond Mutual Fund Net New Cash v Baa Spread to 10-Yr UST
2008
Source Data: Investment Company Institute, Federal Reserve
$80,000 700.00

$70,000
600.00

$60,000
500.00

$
$50,000
M S
400.00
i p
l r
$40,000
l e
i a
300.00
o d
n $30,000
s

200.00
$20,000

100.00
$10,000

$0 0.00
1/1/2008 2/1/2008 3/1/2008 4/1/2008 5/1/2008 6/1/2008 7/1/2008 8/1/2008 9/1/2008 10/1/2008 11/1/2008 12/1/2008

2008 Average Baa Spread

Taxable Bond Mutual Fund Net New Cash v Baa Spread to 10-Yr UST
YTD November 2009
Source Data: Investment Company Institute, Federal Reserve
$300,000 600.00

$250,000 500.00

$ $200,000 400.00

M S
i p
l r
$150,000 300.00
l e
i a
o d
n
s $100,000 200.00

$50,000 100.00

$0 0.00
1/1/2009 2/1/2009 3/1/2009 4/1/2009 5/1/2009 6/1/2009 7/1/2009 8/1/2009 9/1/2009 10/1/2009 11/1/2009 12/1/2009

2009 Average Baa Spread

It appears that the retail investor is “all-in” in fixed income. The positive sensitivity to taxable
bond mutual fund flows in rates and spreads appears to now be somewhat muted. As in
equity, the correct adjectives to be used in describing the recent price action include “street-
driven affair”, “courtesy of the taxpayer”, and “brought to you by the Federal Reserve”.

It appears as though “the street” is in charge of the marginal move in equity, rates, and
spreads going forward. Somehow, didn’t we know this to start with?