Signs of ‘Great Rotation’ as Inflows Hit Record for U.S. Equity Funds

It’s too early to tell if the “great rotation” has begun, but indicators are strong—very strong, according to TrimTabs Investment Research. The firm reported Tuesday that U.S. equity mutual funds and exchange-traded funds received a record $40.3 billion in July, easily surpassing the previous record of $34.6 billion in February 2000.

“We really only a few months of these heavy flows, but yes, the ‘great rotation’ so many pundits have been expecting may finally be starting,” David Santschi, TrimTabs CEO, told ThinkAdvisor.  “In June and July, U.S. equity funds posted an inflow of $39.9 billion, while bond funds redeemed $90.1 billion.”

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Santschi noted this strong enthusiasm for equities “should give contrarians pause,” adding that four of the 10 largest inflows into U.S. equity funds occurred at the peak of the technology bubble in early 2000.

An oft-cited statistic from the Investment Company Institute found that investors poured a record $309 billion into equity mutual funds at the top of the market in 2000, purchasing shares at the highest possible price, while pulling a record $50 billion from bond funds.

Conversely, investors put a record $140 billion into bond funds in 2002, while pulling a record $27 billion out of equity funds at the bottom of the market, selling at the lowest price. In both instances, investors did the exact opposite of what prudent investment required.

While noting the trend, Santschi (left)was hesitant to compare current actions to the previous decade; central banks are intervening to a much greater extent, he argued, and market expansion means “it can be stretched further.”

TrimTabs also reported that outflows from bond funds are persisting.  Bond mutual funds and exchange-traded funds redeemed $21.1 billion in July after losing a record $69.1 billion in June.

“Investors dumped bond funds at a record pace at the mere suggestion that the Fed might take away the punchbowl sometime in the future,” Santschi concluded.  “What will happen when the Fed does more than just talk?”

In a related note, bond giant PIMCO saw $7.4 billion pulled from its mutual funds in July, marking the second-biggest monthly outflow on record after June.

DoubleLine Capital also suffered its second month ever of outflows in July. The Los Angeles-based firm had $631 million pulled from its U.S. mutual funds in July, on the heels of $1.45 billion pulled in June.