Opinion: Mutual Funds in Times of Crisis

Head of Global Consulting at Strategic Insight Daniel Enskat examines the influence of mutual funds in turbulent economic times.

What is the role of and the impact on mutual funds in times of crisis? In light of yesterday’s events – the brief 1,000 point plunge of the Dow, currency roulette (Euro and Pound vs. Dollar), elections in the UK, the Greek debt situation – and the myriad of uncertainties in the market today, it is worth reviewing Strategic Insight research on investor redemption patterns in times of distress.

Fund investors typically do – nothing.

Looking at 85 years of fund history, we have concluded that capital preservation driven withdrawals have always been short lived. During past times of financial uncertainty (1987 stock crash, multiple recessions, 9/11, wars, Tsunamis, SARS, Asian crisis, LTCM, sub-prime, et al), investors reduced (sic!) the turnover of their financial assets.

Redemption activity tends to decline in a bear market, with the exception of brief and modest spikes during sharp down-market days.

Behavioral elements such as myopic loss aversion and inertia partially explain this trend, but there are additional structural buffers in the fund industry.

Portfolio managers always act as a buffer as their purchasing and redemption patterns mitigate short-term emotional withdrawals by investors. Moreover, retirement investing, dollar-cost-averaging, asset allocation considerations, broader diversification through investment solutions and some opportunistic buying will prevent sustained and large net redemptions in the fund industry.

And indeed, despite numerous investor concerns and a heavy emphasis on fixed income products last year, mutual funds in the last 12 months attracted $1.2 trillion in net cash flows around the world, including some $350 billion in the first quarter of 2010.

Back to basics.

To contact the writer of this story: Daniel Enskat at <a href='mailto: denskat@sionline.com'> denskat@sionline.com</a>