Analyzing fund flow is key

NEW YORK – It seems there’s always a mutual fund, or category of funds, that’s become the darling of the stock market. Perhaps it’s small-caps one year, value funds the next. And of course, there are always funds that fall into the loser category.

Should you follow the trend?

Some mutual fund analysts look to fund flows – the amount of money flowing into and out of mutual funds of all kinds – as a key measure of investor confidence in different types of investments. When equity funds see a lot of outflows, for example, confidence in stocks is low.

Measuring the amount of money going into and out of various kinds of mutual funds can give investors a snapshot of what’s “hot” at any given time; however, following the trend can be an exercise in futility, as market volatility can turn quickly. And mutual fund investors, by their very nature, do not want to be bogged down by huge amounts of homework.

Nonetheless, fund flows can be a good tool to put into the mix when looking at initial fund allocations or an annual portfolio rebalancing. The trick, however, is to adopt a contrarian viewpoint, analysts said.

“How investors invest is similar to driving your car with your hands on the steering wheel, your foot on the gas and your eyes on the rear-view mirror,” said Charles Biderman, President of TrimTabs.com, an investment research firm. “Looking at fund flows and then matching the trend never works. You have to do the opposite.”

Here’s why: The most widely used fund flow reports are usually issued for the prior month, and measure a month’s worth of trends. By the time investors get the data, the trend may have peaked and changed.

For example, mutual fund watcher Lipper reported that large-cap funds had $4.8 billion in outflows in April, meaning that investors had soured a little on larger companies; however, May saw a strong shift in investor sentiment, with many investors becoming more bullish in equities in general, and specifically in blue chip stocks.

There are a number of places where mutual fund investors can look to find monthly fund flow data. The Investment Company Institute, a research and lobbying organization for mutual fund companies, posts basic flow data each month on its Web site. Lipper has a more detailed analysis of fund flows on its Web site. Access to both reports is free.

Investors should also note the scope of the flows into and out of a given fund type. While a $2 billion shift may seem like a lot, keep in mind that at any given time there’s approximately $4 trillion invested in U.S. mutual funds.

Once the data is used in making initial investments or an annual reallocation, investors shouldn’t worry too much about fund flows, especially those investing for the long term.

Some individual mutual funds post their monthly inflows or outflows as part of the data regularly offered to investors; however, analysts said the flows mean little when deciding whether to invest in, or get out of, a given fund.