By Scott Ronalds

Recent data out of the U.S. suggests that American retail (individual) investors have been watching the stock market rally from the sidelines. According to an article by Morningstar USA, investors have pulled an estimated $4.4 billion out of U.S. equity funds so far this year (as of October 31st). While the bleeding pales in comparison to 2008, when nearly $100 billion was redeemed from these funds, investors appear to remain very cautious of equities. International stock funds have fared better, with $16 billion in net sales ($70 billion was redeemed from the category last year). By and large, however, asset flows into equity funds have been anemic, and very little of the retail money that was pulled out in haste last year has returned to stocks.

It’s the opposite story for bond funds, where net sales have reached nearly $300 billion this year (2008 sales totaled $34 billion). All this in an environment where short-term interest rates are at their lowest levels ever, and 10-year U.S. Treasuries are yielding less than 3.5%. Where has the money come from to fund these purchases? Money market funds. As the Morningstar article points out, roughly $400 billion has been redeemed from these funds this year. After reaching a peak in January at $3.6 trillion, the mountain of cash sitting in money market funds has shrunk somewhat. Yet, there is still a significant amount of idle cash that could be re-deployed in the equity markets at some point.

Clearly, retail investors have not shed much of their aversion to risk. The numbers suggest that rather than taking advantage of a beaten up stock market, Americans have been ‘riding the pine’ in 2009, preferring the safety of bonds over the volatility of stocks.

It’s a similar story in Canada. Retail investors at home have pulled $4.8 billion out of equity funds year-to-date, with $9.8 billion flowing into bond funds, according to the Investment Funds Institute of Canada (IFIC).

It’s also evident that professional money managers have been acting in an opposite fashion. Internally, our fund managers have been putting funds to work since last fall and have brought down their cash positions (quite substantially in some cases) from pre-meltdown levels. Anecdotally, we’ve heard and seen much the same from other managers.

At Steadyhand, our clients have benefited from being in the game, as most sat tight through the volatility and many added to equities when the markets were bottoming. We’ve opined that we may be ‘stuck in the middle’ right now in terms of valuations, sentiment and the direction of the economy. Tom also suggested some acts of caution in his last Globe article. If there is more fuel for the rally, however, it may well come from all those investors who are still sitting on the bench.

Related Reading:
A Mountain of Cash in the Waiting
The Risk Today is Not Buying Cheap Equities
Tackling Uncertainty This RRSP Season
Stuck in the Middle