Obsessed Over Market Fund Flows? Well, Get Over It
If you find yourself spending a lot of time recently obsessing over how much money has flowed in and out of the financial markets, you might want to find a hobby.
Truth is that while metrics showing how much cash has been moving out of bonds and into stocks, or vice versa, make for interesting dinner conversation and provide a slight peek into the mind of the retail investor, they don't tell you very much about actual price movement.
A lot has been made of the record $73.1 billion that, according to market research firm TrimTabs, came out of mutual and exchange-traded bond funds in June.
While fixed income flows remain positive for the year to the tune of about $42 billion, investors have focused on the recent money movement and the sharp corresponding increase in interest rates.
Tuesday brought news that bond giant Pimco's flagship Total Return Fund—down 4 percent in 2013—saw record outflows of $9.6 billion in June, according to Morningstar. The $268 billion fund, though, rose as the news hit.
(Read More: Ouch! Pimco Funds Suffer Record Outflows in June)
In reality, the actual performance of funds on both the equity and fixed income sides has tended to have little coordination with money flows.
With its drastic moves, June provides an effective example.
In 80 percent of the month's trading days, investment-grade bond funds saw outflows, while 20 percent saw inflows. Yet the sector saw spreads widen just 58 percent and tighten 43 percent of the time, "essentially a coin flip and not terribly consistent with the flow percentages," according to a Citigroup analysis.
Popular loan funds, meanwhile, saw no outflows for the month yet had spreads widen 55 percent of the time, which doesn't correlate at all.
(Read More: Before Exiting Bonds, Try These Ideas)
Yet the fund-flow meme continues to pervade.
"We're not saying higher rates are good, but from a bondholder's perspective there is not much evidence that they are bad either," the Citi analysts said. "Maybe it's a stock market problem."
Stocks, though, show an even lesser correlation.
This year has seen equity funds pull in a massive $150 billion, but that sharply reverses a trend that saw mutual funds alone lose more than $330 billion over a four-year period that saw stocks increase 130 percent.
In June, the lack of a correlation between flows and price movements held up.
(Read More: Why All the Bond Selling Hysteria May Be Overdone)
Stocks saw outflows of eight days, during which the S&P 500 rallied four times. In the 12 days of inflows, the stock index fell six times.
One of the great beneficiaries for stocks during their four years of outflows was that there was always someone on Wall Street looking to take up the other side of the trade.
The longstanding bond bull market now is likely to face the same test.
"Fund flows are certainly relevant, but they are only one ingredient in a big recipe, so to speak," Citigroup said. "Our take is that the investors may be overly focused on fund flows currently, and we would look to take advantage of dislocations that emerged in the wake of recent volatility."
—By CNBC's Jeff Cox. Follow him @JeffCoxCNBCcom on Twitter.