Where have all the investors gone?
The stock market has turned remarkably quiet in recent years as retail investors shun stock ownership.
Trading volume for the New York Stock Exchange has been cut in half from where it stood in 2006, before the onset of the financial crisis and U.S. housing debacle.
Money that once flowed into equity mutual funds has veered into bond funds, where yields are small but there is a perception of safety from market volatility.
According to the Investment Funds Institute of Canada, equity mutual funds that used to attract about $2-billion in net sales per month prior to 2007 are now suffering net redemptions most months. Fixed-income funds have seen net sales triple in 2012 compared to recent years.
“It’s definitely more conservative,” said Sukanya Srichandra, statistics manager at the IFIC.
In the United States, the Federal Reserve reports that stock ownership, either directly or through mutual funds, now accounts for less than 38 per cent of financial assets at the average household. That is down since the first quarter of 2011 even though the S&P 500 has risen almost 9 per cent over this period.
Beyond the numbers, investment professionals say there is a feeling of abandonment.
“The phone used to ring and you could see the money flowing in,” said a broker, who asked to remain anonymous. “And that has just stopped.”
John DeGoey, associate portfolio manager and certified financial planner with Burgeonvest Bick Securities in Toronto, noted that investors no longer see any need to rush into the market for fear of missing out on returns.
“There is no sense of opportunity cost,” he said. “People don’t feel a sense of urgency about getting new money invested.”
The spectacular bear market that began about five years ago is largely to blame for this momentous shift in investor behaviour. The S&P 500 slumped a total of 57 per cent and Canada’s S&P/TSX composite index fell 50 per cent, shattering the belief that stock ownership was the best way to build wealth over the long term.
But various market shenanigans have also pushed investors away, which is why the market’s impressive rebound since early 2009 has done little to revive activity. Indeed, many investors believe the market looks either distorted or rigged.
High-frequency traders and their souped-up computers took the blame for the so-called Flash Crash of 2010, which sent the Dow Jones industrial average careening about 9 per cent in a matter of minutes and left investors dumbfounded.
Facebook Inc.’s much-anticipated initial public offering in 2012 only added to the ill-will. The share price plunged 50 per cent by August, leading to a flurry of allegations that Wall Street bankers had taken advantage of regular investors.
The question now is what will bring investors back to the stock market.
The bullish view is that investors will at last recognize the four-year-old bull market in stocks in 2013 and accept that the U.S. economy is on the mend, with unemployment headed down and the housing market on the mend.
Laszlo Birinyi, president of Birinyi Associates, told Bloomberg News that this shift should pull “everyone in the pool” and send the S&P 500 to record highs.
However, not everyone believes a rush back into equities is imminent. Pension funds have been decreasing their equity allocation in their massive portfolios – a shift that could be influencing individual investors.
The Ontario Teachers’ Pension Plan, which has more than $117-billion in assets, has reduced its equity allocation to 44 per cent from 65 per cent in 1995.
According to Milliman, the Seattle-based actuarial firm, U.S. corporate pension funds have taken a similar route, with equity allocation falling to an average of 38 per cent from 60 per cent as recently as 2006.
John Ehrhardt, principal and consulting actuary at Milliman, believes the trend is unlikely to reverse significantly, even if stocks surge.
“As these plans get better funded, they’re going to take risk off the table, and they’ll move more into fixed-income investments,” he said.
Exchange-traded funds – baskets of securities that trade on stock exchanges throughout the day – offer one hopeful sign:
Canadian assets under management rose 25 per cent in 2012, according to BlackRock Asset Management, as investors turned to low-cost alternatives to mutual funds.
However, the ETF landscape reflects a similar dissatisfaction with stocks. The percentage of assets in Canadian equity ETFs shrank to 51.3 per cent from 56.5 per cent in December, 2011. The percentage of assets in fixed-income ETFs rose to 33.5 per cent from 28 per cent.
If investors do flock back to stocks, it could take some time.
“When we had this meltdown in 2008 and 2009, a lot of people were saying it could take us a decade to emerge from this,” Mr. DeGoey said.
“If they’re right, we’re now heading into Year Five of what might be a 10-year game.”