Have We Seen This Movie Before?
From a friend . . .
A recent article appearing on the Morningstar website reported that mutual fund investors have been selling their shares in record numbers. For the month of September alone, net redemptions amounted to $49 billion, the largest one-month outflow since Morningstar began tracking redemption data in January 2000. A related article appearing in Forbes reported that funds experienced $56 billion in net redemptions during the first half of October, citing data from TrimTabs Investment Research. Forbes points out that year-to-date redemptions represent only 3.2% of the $5.5 trillion invested in stock funds, but it is noteworthy because 2008 is the first time that fund flows have turned negative since the bear market year of 2002.
Karen Dolan, Morningstar's director of fund analysis, observed that the redemption activity "has implications for funds and shows a repeat of investor behavior that seems unlikely to pay off for anybody." She observes that an appealing characteristic of the mutual fund structure is the freedom enjoyed by fund investors to redeem their shares at net asset value (in most cases) without incurring any cost. Most of the time this arrangement works well, she says, but to the extent heavy redemptions put pressure on fund managers to sell securities quickly, the remaining fund shareholders may be penalized by the transaction costs attributable to departing investors. Dolan cites an academic study that found that fund trades motivated by shareholder cash flows are more costly than voluntary trades motivated by research.
If fund shareholders who remain invested are disadvantaged by such trading, does the evidence suggest that investors who sell are making a smart choice? Dolan is doubtful. "Cashing in during a fear-stricken period like the one we're in now is like watching a bad horror flick where the plot is clear and predictable from the very start. Investors are notoriously bad market timers . . . we've found that investors buy high and sell low to their own disadvantage."