What’s the smart money been doing with their money this year? Other than losing a lot of it (see hedge fund hotels Sun Edison and Valeant Pharmaceuticals for example), they are net sellers of U.S. stocks. According to the latest from Bank of America Merrill Lynch, BofA’s institutional and hedge fund clients, the so-called smart money, have yanked a net $24 billion out of U.S. stocks YTD. Who is buying what they are selling? Retail investors are net buyers of U.S. stocks for the first time in seven years, but if you exclude ETFs, they too are net sellers (I’ll come back to this in a minute). Retail inflows are small relative to total outflows from institutions and hedge funds so what makes up the difference? The corporate sector. Buybacks and acquisitions are the primary means of corporate investment in the U.S. stock market.
So if we can assume BofA’s clientele is representative of the entire market, we have institutional investors and hedge funds selling stocks to index-based ETF investors and the corporate sector. The first group is by and large value conscious while the latter group is agnostic to value. In fact, the corporate sector’s appetite for U.S. stocks has proven to be inversely correlated with value. They buy more as the market rises and less when it falls.
This all makes for an interesting market dynamic, does it not? It probably also goes a ways toward explaining how the cap-weighted indices that are being driven by stocks that no value conscious investor would touch remain up year-to-date while the average stock remains down.
Jeremy Jones, CFA
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