Morningstar Reckons Fund Flows Due To Flash Crash

Friday, October 15, 2010

Morningstar Reckons Fund Flows Due To Flash Crash

On Morningstar: Fund Flows Show Two Takes on Risk

........ Morningstar Director of Personal Finance Christine Benz spoke to Editorial Director Kevin McDevitt to delve deeper into the wayward ways of investors and the risks of following trends.

Click here to see the video clip

Part of the transcript:

Benz: So, Kevin, I'd like to discuss the ongoing trend toward bonds. It appears that we're still seeing investors showing a strong preference for bonds over equities. Why do you think that is? What are the drivers there?

McDevitt: Absolutely, there are a couple of drivers. I think the main one is just people are trying reduce risk in their portfolios. And you're seeing it on two fronts. One is getting out of equities, but then there is also a push, I should say, which is not necessarily tied to risk, it's more tied to the lack of return on money market funds.

It's amazing that trends we've seen since the Fed took rates to zero back in December of 2008. Ever since then you saw a huge push into short-term bond funds in particular.

So I think on one hand, again, it's risk aversion in terms of equities, but then even more than that perhaps it’s money moving from money-market funds into short-term and intermediate-term bond funds.

Benz: So seeking a little bit of yield pickup. Whether that's a good idea or not, I guess we're not so sure about that, but…

McDevitt: Right.

Benz: …It's the trend we're seeing.

McDevitt: It's certainly understandable, but right, it's a different issue as to whether that's the most prudent use of your assets.

Benz: Right. So, in terms of the risk-averse group, I know that you mentioned to me earlier that you think that the Flash Crash may have been a little bit of an inflection point for some retail investors. Talk about your thoughts there?

McDevitt: Sure. Well, we had that strong rebound, that great rally in 2009, and you had maybe some investors trying to dip their toe back into equity funds. But things really turned on a dime in May. You started to see big outflows again, and I think in part that's due to the Flash Crash.

Again, on that very day, the market was only down about 3%, which in the scheme of things, is not that bad. But for some reason, or I shouldn't say for some reason, I think there was an intellectual or a psychological response to that, where investors felt like there was an issue of market manipulation. And I think there was somewhat of a lack of trust or a loss of trust in the equity markets.

So, I think for some investors after what they've faced in 2008, in the fall of 2008, and then this on top of it, the Flash Crash. I think for a lot of investors that was the last straw, and they said no matter what happens from here on out, I'm never going to get burned that way again....

( how about Why Small Investors Have No Interest In Equities )

Ah... the flash crash did it! Do check out this incredible video replaying the crash!

Apparently flash crash on individual stocks seems rather in fashion.

Last night, on ZH: Will Taseko Mines' Flash Crash Let The Offending Algo Finally Be Punished?

Anybody who was trading Taseko Mines (TGB) today, experienced a brief heart attack when the Canadian company lost nearly half its value around 2:33 pm Eastern time. In the blink of an eye, the stock price plunged from $7.20 to the mid $4 in what appeared to be another mini flash crash. Subsequently, it recovered, but only modestly, ending the day down about 10% from its open. What is odd is that not only did a circuitbreaker not get activated following the 40%+ drop, but that the exchanges have not canceled any of the trades, meaning that whoever started the selling avalanche is going to be stuck with their $4.58 sales. And as the charts below show, quite a few shares traded at the new baseline. What is oddest, is that there was absolutely no news in the market to cause this move, and to the best of our knowledge there was no rumors circulating either. Mootley Fool reports: "President and CEO Russell Hallbauer issued a statement saying that management "is unaware of any information that would cause the price of the Company's stock to change materially, as occurred on October 14, 2010." The stock had been trading up as much as 11% before the drop, and had hit a 52-week high. The upward movement was largely because of an upgrade from Jennings Capital analyst Peter Campbell. According to The Globe and Mail, Jennings issued a research note that was bullish on copper prices and upped its price target on Taseko by 28% to $10." Could this be the first time when an inexplicable flash crash driven by some jittery algo will not result in the exchanges handing back the HFT's forfeited money right back to them? We hope going forward every since robotic instability is punished appropriately. To all those whose 30-40% OTM limit buys got triggered, congratulations. Once again, we suggest readers establish limit buy positions 40% away from NBBO in stocks and sectors of preference, as the next flash crash is usually just a millisecond away. If lucky, just like in TGB, your trades will stay good