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Alice N. Sanders

S&P 500 Beating World Most Since 1969 Doesn’t Spark Flows

How do you make sense of lackluster flows into equity funds amid the longest outperformance for U.S. stocks since the presidency of Richard Nixon?

For Chris Hyzy of U.S. Trust Co. in New York, it’s just another sign that shares have more room to rally.

Except for in 2013, when $157 billion poured into U.S. stocks, investors have stayed skeptical about the five-year advance that created almost $16 trillion of share value and handed American companies 36 percent of the world’s market capitalization. The reluctance reflects memories of the 2008 financial crisis and is a bullish sign, Hyzy said.

“That event alone, plus all the geopolitical risk, is making the retail investor second guess whether or not this is a good time to come back to something that’s perceived to be risky,” Hyzy, the chief investment officer of U.S. Trust, which oversees $380 billion, said on Sept. 4. “You should expect fund flows to be relatively anemic, but still positive, which leads to a much longer and better secular market.”

The Standard & Poor’s 500 Index is returning almost six times as much as the broadest gauge of global equities this year and has kept that edge since the bull market began -- a feat unmatched since data on the world measure began in 1969, the year Nixon took office, according to data compiled by Bloomberg. At the same time, funds that buy American shares have seen cash pulled for four of the past six years. The $13 billion received in 2014 equals 12 percent of the money sent to the rest of the world.

Equity Outflows

While unprecedented monetary stimulus from the Federal Reserve and share buybacks approaching record levels helped send the S&P 500 28 percent above its previous peak in 2007, investors are reluctant to embrace the rally.

In August, they pulled $5.8 billion from funds that invest in U.S. stocks even as the S&P 500 climbed 3.8 percent, data compiled by Bloomberg and the Investment Company Institute show. It was the second month of outflows after almost $20 billion of inflows in the first half of the year.

Equity funds with a global focus and those investing in bonds took in $13 billion and $10 billion in August and added money every month in 2014.

“People continue to point to this rally as one of most unloved rallies of all time,” Robert Duggan, portfolio manager at SkyBridge Capital II LLC in New York, said by phone on Sept. 4. The firm oversees about $11 billion. “If you think about conservative investors in bonds, for them to make the next push into equities, they’re probably likely to invest in U.S. equities versus equities in foreign countries. The U.S. continues to be viewed a safe place.”

Global Rankings

The S&P 500 has climbed 8.6 percent in 2014, compared with an increase of 1.5 percent in theMSCI World ex USA Index. The benchmark gauge for American equities has advanced at an annualized rate of 24 percent since the bear market’s bottom in 2009, exceeding the 19 percent increase in the global measure.

Better returns are boosting the U.S. in global rankings of the largest companies. Apple Inc., Exxon Mobil Corp., Google Inc., Microsoft Corp. and Berkshire Hathaway Inc. hold the five top spots, compared with two in 2009.

Three rounds of Fed stimulus have propelled an acceleration in the U.S. economy at a time when conflict between Ukraine and Russia threatens to tip Europe back into a recession and economists forecast growth from Japan to China will slow every year through 2016.

Central Banks

The European Central Bank cut interest rates last week and said it will start buying assets in a bid to boost the economy. In the U.S., the Fed is forecast to complete its bond buying program before year-end. U.S. gross domestic product will expand 3 percent in 2015, according to the median estimate in a Bloomberg survey of 79 economists.

“It’s just a much better situation here,” James Liu, global market strategist at JP Morgan Funds in New York, said by phone on Sept. 5. The firm oversees $500 billion. “We’re well past the point where bad things were to happen. The problem that’s in Europe is they’re still mired in this recession mentality.”

While U.S. equities represent better opportunities, money may flow elsewhere as Americans seek to diversify, said David Pearl, co-chief investment officer who helps oversee $40 billion at Epoch Investment Partners Inc. in New York.

Market Share

While the rally in companies from Apple to Exxon has expanded America’s share of global market value since the bull market began in 2009, the proportion is down from 10 years ago. The 36 percent stake compares with 29 percent in 2010 and 46 percent in 2003, data compiled by Bloomberg show.

“There is a long-term trend that investors are moving money to non-U.S.” stocks, Pearl said by phone on Sept. 3. “U.S. citizens have traditionally put all their money in the U.S. and they really need to allocate more evenly.”

Stock buybacks and a flood of takeovers have bolstered equity gains. Mergers and acquisitions have exceeded $1.3 trillion, on course for the busiest year since 2007, data compiled by Bloomberg show. Chief executive officers from S&P 500 companies spent $283 billion on their own stock from January to June, up 30 percent from a year earlier, according to S&P Dow Jones Indices.

That investors are unconvinced gains will last bodes well because it means a pool of money still exists to bid shares up, said Mark Freeman, who oversees about $20 billion as chief investment officer at Westwood Holdings Group Inc.

“Investors are still showing some level of skepticism about what the future looks like,” Freeman said in a phone interview on Sept. 4 from Dallas. “It’s a counter indicator to those who’re saying we’re close to market tops.”


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