Pacifica Partners’ Financial Post Weekly Column – Oct 15th 2009
Many an academic paper has been written to better study mutual fund flows. The conclusion of most of them has been that investors consistently choose to chase returns. That is, they like to follow the herd into the “hot sector”. One year it might be gold or energy and the next it might be emerging market funds. It is a well studied phenomenon in finance that investors’ human nature shows through and through when we look at mutual fund flows. It is always more comforting emotionally to do what the crowd is doing. Yet that very behavior is what costs investors time and again.
For example, in the US the emerging market mutual fund category is seeing enormous inflows of funds from investors. It does not seem to matter that valuations are somewhat on the rich side or that they have missed a substantial the rally already. For an American investor, investing abroad has been a true delight – given the decline in the US dollar. It appears that too many investors are chasing returns. After the decline that most investors suffered the last two years, one would think that investor behavior would have moderated. It seems that in investing – like in many things – human nature never changes.
It is not just the emerging markets. We can say the same thing about gold. Recent data shows that the amount of gold held by investors through the use of exchange traded funds (ETFs) which track the price of gold is just over 1700 tons. To put this in perspective, the ETFs hold enough gold to make them the sixth largest holders of gold in the world – ahead of Switzerland’s national gold reserves and just behind France. Furthermore, one hedge fund is holding enough of the gold tracking ETF to make it approximately the twentieth largest holder of gold in the world.
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