The mountain of cash on the sidelines of financial markets continues to grow. The question for market watchers now is whether there's a catalyst on the horizon that will move those funds out of wary investors' war chests and into the stock market fray.
This year, for the first time since the early 1990s, U.S. investors have more money in cash mutual fund instruments than in stock funds. The Investment Company Institute says total assets for U.S. money market funds hit a record $3.9-trillion (U.S.) at the end of February, and preliminary statistics show they maintained that level in March. Equity fund assets totalled just $3.1-trillion in February, less than half their level of 2007, dragged down by lowstock prices and redemptions.
National Bank Financial noted that money market funds now account for 43 per cent of total U.S. mutual fund assets, their highest share since 1991. Equity funds' share has shrunk to 34 per cent, the lowest since 1990.
"Risk aversion continues to drive up demand for money market funds," said Stéfane Marion, chief economist at National Bank Financial.
In Canada, the shift toward money market funds has been less drastic, but it has still been pronounced. In its preliminary March report issued yesterday, the Investment Funds Institute of Canada indicated that net sales of money market funds were about $1-billion (Canadian) last month, while net redemptions of all other classes of mutual funds were about $600-million. Total assets in Canadian money market funds are now about $75-billion, up roughly 20 per cent from a year ago, while assets in equity funds have shrunk to about $169-billion, down almost 40 per cent.
And mutual funds represent just the tip of the cash iceberg. U.S. holdings in all short-term instruments are estimated at close to $9-trillion (U.S.). In Canada, the M2 money supply - which includes currency in circulation plus the nation's savings and bank deposits - is now more than $900-billion (Canadian), up 14 per cent in the past year.
Analysts said cash, as an asset class, is certainly overweight by historical standards, which suggests investors will eventually rebalance out of cash and into other assets, including equity. But they said it won't happen until investors have a good reason.
"[The high cash weighting] basically shows that investors are waiting for some sign that it's reasonable to redeploy money into the market," said George Vasic, market strategist at UBS Securities Canada Inc. "It represents potential, it represents readily available cash."
Mutual fund analyst Peter Loach said that historically, "you certainly do see [money] blow back [into equity funds] when the confidence returns." While he acknowledged that more people are now viewing cash as "an asset class, not a war chest," the tendency is to drop these low-return cash instruments from their asset mix when returns from equities become too rich to ignore.
"No one's going to be happy with 3 per cent [returns] if stocks are up 40 per cent. Human nature doesn't change."
But Phil Dow, head of equity strategy at RBC Dain Rauscher, suggested that substantial amounts of cash that is on the sidelines may never return to the stock market. Corporate and municipal bonds may be bigger beneficiaries.
"It's tempting to say that is bullish, that it will flow back into the market at the flip of a switch. But it's not so simple," he said. "People feel burned."
© 2007 The Globe and Mail. All rights reserved.
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