What everyone else is doing

Wall Street holds a certain contempt for those who follow the herd on the Street. Just as everyone in Lake Woebegon is above average, so everyone in finance believes themselves to be a brave contrarian, zigging when others zag.

In fact, it’s generally best to run with the crowd, except at crucial turning points in the market. So what is the mutual fund crowd doing these days? Buying international funds, selling U.S. funds, and investing in exchange-traded funds.

The Instampedevestment Company Institute, the funds’ trade group, releases weekly estimates of inflows and outflows from garden-variety open-ended funds. These are funds that you buy directly from the fund company, such as Fidelity Contrafund or the Vanguard Index 500 fund.

So far this year, investors have sold a net $41.3 billion of stock funds, according to the ICI’s most recent estimate, and purchased a net $2.8 billion of bond funds. What’s particularly striking, however, is that investors have sold $147.4 billion in U.S. stock funds, and purchased $106.4 billion in international stock funds.
Some of the money that fled traditional stock mutual funds, presumably, has gone to exchange-traded funds. Domestic stock ETFs have seen inflows of $65.6 billion this year through October, the latest information available through Morningstar. International stock funds have have seen net inflows of $89.9 billion.

Nevertheless, fund investors seem to be treating the U.S. stock market the way you’d treat a drunken badger. Why no love for U.S. stocks?

One explanation is that most investors purchase funds with an adviser at their side, and a standard diversification move is to put 20% to 40% of a client’s stock holdings into international funds. And in recent years, investors have been doing just that. In October, 74% of stock-fund assets were in U.S. funds, while 26% was in world stock funds. In 2000, investors had just 14% in world stock funds. And in 1985, that figure was just 7%.

World stock funds hasn’t done anyone any favors this year. The average large-company blend fund has gained 1.8% in 2015. vs. 1.19% for large-company foreign blend. But you never know when foreign stocks — which are less expensive than their U.S. counterparts — will rise again.


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