Gross's Pronouncement That The Equity Cult Is Dead Doesn't Take Into Account Passive Fund Flows

Tuesday, August 07, 2012 07:11
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Gross's Pronouncement That The Equity Cult Is Dead Doesn't Take Into Account Passive Fund Flows

Tags: investing | investor behavior | mutual funds

PIMCO chief Bill Gross proclaimed that the cult of equities is dead. And it’s true that investors have been pulling money out of actively managed equity mutual funds for years now. But it’s not so true for passive equity exchange traded funds (ETFs). Morningstar says investors funneled almost $7.5 billion into the funds in July. That’s in keeping with a developing trend over the last five years.

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Active managers have not earned their keep over the past five years so money has been flowing out of them and into bond funds and passive equity strategies. Only 36% of active mutual fund managers have outperformed the S&P 500 since 2008. The last three years have been the worst with only 17% of managers beating the benchmark index.
 
Mutual fund stars such has American Funds and the Janus Group rose to prominence during the height of the equity cult days. That’s also the time that made Vanguard the largest mutual fund manager in the world.
 
Veterans of technical analysis will say that almost any time a large pronouncement is made—like the recent death certificate Gross gave equities—signifies a turning point. And it’s usually not in the direction of the pronouncement.
 
Of course, it also may not be immediate. And after a five-year trend where the crowd is pouring money into passive investments, a turnaround in the markets may be coming due.

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