One of the big stories in the mutual fund business this year has been the way money has finally started flowing back into equity funds. After investors pulled more than $400 billion out of such funds since the market crashed in 2008, domestic stock funds have taken in nearly $19 billion so far this year through April 10.
Initially, it looked as if those assets were being transferred over from bond mutual funds. But now it increasingly seems as if those funds are coming from pure safe-haven accounts, such as money market funds and Treasury Inflation Protected Securities, or TIPS funds. Both of those categories have been hemorrhaging money all year and appear to be the biggest sources for the inflow into stock funds.
That could be indicating something even more significant than money moving from bond funds to stock funds. Bonds, of course, are considered to be safer investments than stocks, but money market accounts are in a whole different class of safety. And TIPS funds , while not as secure as money market funds, are designed to provide a different kind of security in the event that inflation spirals out of control. This is money that could truly be considered to be have been on the sidelines, now emerging back into the lifeblood of the economy.
Here's what's been happening to money market funds: For the week ended this past Wednesday, investors — both institutions and individuals — pulled more than $27 billion out of such funds, after pulling $8 billion from them the week before. According to data compiled by the Investment Company Institute, retail investors alone have taken $39 billion out of money market funds since the beginning of the year, for an overall decline of 4 percent.
There is still more than $2.5 trillion in America's money market funds, so we're not exactly in danger of wiping them out. But it's possible that outflow could turn into a stampede. The International Monetary Fund issued a warning recently that the flood of money unleashed by central banks around the world are creating unique stresses in the banking sector. Money market funds' returns are already barely above zero, but the IMF fears that it may become plausible that banks can't even pay back what depositors have put in. "Another run on money market mutual funds may occur if downside credit risks materialize or securities lending suddenly halts," the IMF's Global Financial Stability Report warned earlier this month.
Money market funds generally invest in ultra-safe government securities or the most highly rated commercial paper, which does little for investors. The only real risk is that the banks won't have enough assets on hand to return that money to the depositors. If investors put that money back into equities, or into riskier, lower-rated bond funds, those assets start working in more productive ways again and may help push the value of the securities a bit higher.
Something similar is happening with TIPS funds, which are designed to protect against long-term inflation. When the Federal Reserve began its program of quantitative easing back in November 2008, many investors feared that this would inevitably lead to inflation spikes, and assets in TIPS funds grew appreciably.
