Seasonal Asset Allocation: Evidence from Mutual Fund Flows
Mark J. Kamstra, et al. | Working Paper | August 1, 2011
This paper explores U.S. mutual fund flows, finding strong evidence of seasonal reallocation across funds based on fund exposure to risk. We show that substantial money moves from U.S. equity to U.S. money market and government bond mutual funds in the fall, then back to equity funds in the spring, controlling for the influence of past performance, advertising, liquidity needs, capital gains overhang, and year-end influences on fund flows. We find a strong correlation between mutual fund net flows (and within-fund-family exchanges) and the onset of and recovery from seasonal depression, consistent with the hypothesis that investor risk aversion varies with the seasons. Further, we find stronger seasonality in Canadian fund flows (a more northerly location relative to the U.S., where seasonal depression is more severe), and a reverse seasonality in fund flows for Australia (where the seasons are reversed). While prior evidence regarding the influence of seasonal depression on financial markets relies on seasonal patterns in asset returns, we provide the first direct trade-related evidence.
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Book Bits For Saturday: 8.27.2011
● The Euro: The Battle for the New Global Currency
By David Marsh
Review via Global Financial Strategy
With the euro saga playing out almost like a Shakespearean tragedy in Brussels, Berlin and Paris, it is good to get a clearer perspective on the origins, miscalculations and inherent problems at the heart of the eurozone’s birth. Fortunately enough, the Mutterer is now reading the second edition of a highly insightful account by David Marsh, co-chairman of Official Monetary and Financial Institutions Forum, ex-European editor for the FT, and GFS contributor. Financier George Soros has described the contents as “the stuff of a political thriller” no less. “When David Marsh first wrote his book, I thought that some of his theses were exaggerated. In fact, he foresaw many of the problems that have since befallen the euro,” says Soros.
Bernanke Speaks Without Saying Much
Fed Chairman Bernanke says he understands the nation’s economic pain. Speaking earlier at the Fed’s Jackson Hole conference, he also explains that “monetary policy must be responsive to changes in the economy and, in particular, to the outlook for growth and inflation.” But he downplays the prospects for additional stimulus. “Normally, monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view…” This despite his observation that “the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus.” Quite true, but apparently those tools will be kept in the shed for the foreseeable future.
Inflation (And Bernanke) Expectations
The market’s inflation outlook is holding steady again, but for how long? The implied inflation forecast, based on the yield spread between the nominal and inflation-indexed 10-year Treasuries, was 2.1% yesterday. That’s roughly where it’s been for the past week. It’s also down from 2.6% in early April. But we’re still a long way from the 1.5% at this time last year. What might be the next catalyst that moves the current inflation forecast — up or down? Fed Chairman Ben Bernanke’s speech later today is first on the list.
Bernanke v. Bernanke
How should we judge tomorrow’s speech by Fed Chairman Bernanke? How about Bernanke’s previous comments on a similar macroeconomic challenge? Paul Krugman says Bernanke’s chat on Japan’s malaise are a useful primer for evaluating what we’ll hear to tomorrow. Krugman refers to “Bernanke’s 2000 critique of the Bank of Japan for its failure to take strong action in the face of an economy that was actually in much better shape than the US economy right now.”
Jobless Claims: Stalled Again
Initial jobless claims are going nowhere once more. And that’s the optimistic view. It’s not the first time that the trend looked like it was turning favorable only to hit a wall. It’s probably not the last time we’ll suffer a headfake, but that doesn’t make it any more frustrating. The good news, in relative terms, is that new jobless claims aren’t moving in a fatal direction, not yet. The main fallout is that the hope of a follow-through to the recent drop hasn’t materialized. In other words, we’re still stuck in the land of neutral. That’s not good, but it’s not a smoking gun for expecting a new recession either–not today, at least, given the numbers in hand.
Are We Facing Another Troubling Rise In Money Demand?
Economist John Taylor of Stanford is worried that the appetite for liquidity is rising… again. The source for this concern starts by recognizing that “quantitative Easing (both I and II) has caused the monetary base—the sum of currency and bank reserves—to explode in the past three years, but has not resulted in similarly large increases in the growth of broader measures of the money supply such as M2,” he writes. Why hasn’t M2 followed suit? Because banks are sitting on the liquidity injected into the system.
New Orders For Durable Goods Rise, But Business Spending Slumps
New orders for durable goods, a widely monitored leading economic indicator, rose 4.0% in July on a seasonally adjusted basis, the U.S. Census Bureau reports. That’s the highest monthly gain since March, although the increase is somewhat tainted because a big chunk of the advance came from a surge in aircraft orders. Excluding transportation, durable goods orders rose by a milder 0.7%. Even so, the gain suggests that while the economy continues to struggle, the risk of an imminent recession remains a low-probability event.
Is Business Spending At The Tipping Point?
“Business spending has been the recovery’s bright spot,” notes Kelly Evans in today’s Wall Street Journal. “Now, it too may be fading.” We’ll know for sure, one way or the other, later today, when the update on durable goods orders is released. Meantime, it’s premature to say this indicator has succumbed to the dark side. But the risk can’t be dismissed, given the recent weakness in the overall economy.
Treasuries: Priced For Disaster
Anxiety levels are rising and Treasury yields are falling. The pairing isn’t unrelated, but the depth of the fall in government yields is astounding nonetheless.