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Municipal Apocalypse Now?   Mutual Fund Investment Trend Analysis - ONYX RESEARCH, INC.®

State Pension Fund Contribution Levels (100% = Fully Funded Pension Plan)

State Pension Fund Contribution Levels (100% = Fully Funded Pension Plan)
Figure 3. Pension Funding Percentages by State. States with darker blue have more funds dedicated to pension fund liabilities. States in white have lower pension funding levels. The key on the right details funding percentages. (Plot adapted from The Trillion Dollar Gap)

Most United States fund investment is in either long-term mutual funds or money market funds. The distribution between the two pools is plotted in figure 4.

Total, Long-Term, & Money Market Mutual Fund Distributions Since 2007 Figure 4. Long-term and Money Market Capital Distributions Since 2007. Red curve plots long-term investment over time. Green curve plots money market funds. Gold curve plots the long-term + money market total.

Long-Term United States Fund Flows

Incremental, and relatively slow, capital injection and liquidation are plotted in figure 5 (compare this plot to oil price fluctuations). Figure 5 plots monthly capital injection and liquidation since 2007. Although injections appear small, net results are significant–$700 billion has been added to investment funds since 2009.

Total Long Term Mutual Fund Flows

Figure 5. Long-Term United States Mutual Fund Flows and Net Flow since 2007. Blue curve plots monthly capital injection or liquidation. Gold curve plots net value.

The net value in figure 5 lumps bond and equity investments. How has capital injection and liquidation split between bonds and equities?

Long-Term United States Bond Fund Flows

Figure 6 plots net long-term bond fund flows (including municipal and taxable bond net flows). Leveling since mid 2010 and declining through early 2011, municipal bond flows have declined.

This market signal strongly encourages state and municipal leadership to address liabilities now. Without muni bond opportunities, public leaders will have significant governance challenges.

More generally, data indicate investors currently prefer lower risk investment in bonds when compared to equities.

Long Term Bond Mutual Fund Flows Figure 6. Net Long-Term United States Bond Fund Flows since 2007. Bond fund flows dominate mutual fund investment. Net capital injections are flat because recent municipal flows have decreased.

Long-Term United States Equity
Fund Flows

Investment in United States equity funds is, surprisingly, negative, except for foreign investment.

Notably, the domestic outflow trend begins before the housing hiccup and financial failures seen in 2008. Contrasting the ~$350 billion domestic outflow, foreign inflows approach ~$200 billion.

Figure 7 plots domestic, foreign, and total net capital flows into long-term equity funds. The gold line indicates ~$150 billion in long-term funds were removed since 2007.

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