Contrarian Alert: Domestic vs. International Mutual Fund Flows

From today’s IBD.  Please forgive the messed up formatting… or better yet, please let me know how to avoid or easily correct it when cutting and pasting from the web.  Thanks!

Fund Investors Cool To

U.S.

Markets

More Outflow In Jan. The hot money rushes into foreign markets, but is tide set to turn?

BY KEN

HOOVER

INVESTOR’S BUSINESS DAILY

Mutual fund investors don’t seem to have much faith in the

U.S.

stock market these days. Despite a smart rally — the S&P 500 is up 7.3% since its Oct. 13 low — money has been coming out of

U.S.

stock funds.

    Investors have pulled a net $500 million out of

U.S.

stock funds since August, according to the Investment Company Institute and TrimTabs.

    During the same period they’ve shoveled $60.9 billion into international funds, which have been performing better.

    At first glance, that might seem like bad news for those rooting for the

U.S.

market. After all, it takes new money to drive prices higher.

    But in the perverse ways of the stock market, it might actually be good news for

U.S.

fans.

    The reason: The crowd is usually wrong at the major turning points in the market. Most investors are too afraid to step in just as stocks get ready for a sustained rally. And they throw money greedily into the market just as they should be reining in their enthusiasm.

    One observer who’s noticed this trend is Charles Biderman, who heads TrimTabs, a

Santa Rosa

,

Calif.

, company that tracks money flow into and out of stocks.

    “The

U.S.

economy is growing faster than any place except emerging markets,” Biderman said. “But investing in

Japan

, the

U.K.

,

Germany

? I can’t understand it.”

    Despite strong earnings growth,

U.S.

stocks trended sideways to slightly up until last fall’s rally started. The S&P 500 rose about 15% from Dec. 31, 2003.

    At the same time, foreign stocks as measured by the EAFE index of 20 top overseas stock markets were up 40%.

    And foreign markets have been attracting the hot money.

    In December, international funds brought in a net $12.3 billion, the biggest amount since the record-setting month of February 2000, according to the Investment Company Institute, the mutual fund industry’s top trade group.

    At the same time,

U.S.

stock funds had a net outflow of $2.2 billion in December. It was the fourth month in the past five that domestic stocks had net outflow.

    The trend continued into January. TrimTabs estimates $1.6 billion in outflow from

U.S.

funds and $10.2 billion in inflow into international funds.

   

U.S.

fund investors are usually socking money away. Net outflow is something you usually see only near market bottoms when panic prevails.

    In that biggest month of inflow in history, February 2000, investors put $36.52 billion into

U.S.

stock funds. In hindsight, they should have been taking money out.

    The biggest month of outflow was July 2002 when investors were net sellers to the tune of $49 billion

• . This was just before the market bottom in October 2002

• . Could the mass of investors be wrong again? Could this be a turning point in which domestic, not international funds are the place to be?

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