"Follow the money" can serve as a good starting point for identifying strong-performing mutual funds, said analysts at Standard & Poor's.
In "Follow the Mutual Fund Money Flow," the authors concluded that "one of the central tools for surmising investor sentiment is money flow — the rate that money is going in and out of a financial investment."
Money-flow analysis, they suggest, can "help investors decide whether it is a good time to invest in one peer group of mutual funds or another."
To test their thesis, the researchers looked at mutual fund peer groups that had the most money inflows year to date in 2011, using the Lipper Fund Flows Database, which looks at weekly investor flow trends on some 19,000 open-end mutual fund share classes with an aggregate asset base of $11 trillion.
Their conclusion: the domestic natural resources group had the largest inflow as a percentage of total assets, at 11% over the period. They note that it was the only sector to register a double-digit increase in cash inflows, and that it beat the No. 2 peer group, basic materials, by three percentage points.
Report author Ari Bensinger cautions that following the money as a strategy always carries the risk that investors could be "chasing past performance," but he said, "There is nonetheless a correlation between past performance and future continued performance."
He says the idea is only to use the "follow the money" theme as an initial screen. "Then you have to look at individual fund performance, market conditions and so on."
Asked whether following the money also made sense as a strategy for getting out of certain sector mutual funds, Bensinger said, "Sure, it could also work in reverse."
