Some interesting data came across my desk this morning, confirming what we’ve suspected in our blog musings and economic updates over the past few days and weeks. 

According to TrimTabs data released this morning, the average U.S. equity fund has slightly outperformed the average global equity fund so far in October.  In addition, fund flows to U.S. equity funds outpaced foreign funds for the first time in quite awhile at $6.6 billion versus $5.2 billion.  This is quite an amazing turn of events, as foreign fund flows accounted for as much as 80% of all new fund flows in recent years while growth funds often experienced negative outflows. 

Of course it’s very early and only a short period of time, but I do think this data is insightful and perhaps predictive.  I would suspect that a high percentage of the U.S. fund flows so described have also moved into growth funds, but I haven’t yet seen that data nor do I know if it is available.

In the short term, fund flows do affect stock prices, much like any other product in the market place.  Higher demand associated with more dollars seeking purchase, pushes up prices in the absence of new supply.  Longer term, of course, higher earnings have to account for some of the higher prices, but not all of it, especially if interest rates are declining.  As prices move up, new companies will also come to market, seeking to absorb some of the funds being allocated to high growth, high innovation opportunities, or whatever else happens to be in fashion at the time.  (private equity recently, tech and venture capital in the 90’s, housing in the earlier part of this decade)

For now, the actual data is confirming what we’ve been suspecting.  Strong near term performance is being caused to some extent by the reality of increasing fund flows, particularly on the growth side.  Will it be matched by stronger earnings growth?  Over time, I believe the answer is yes, particularly on a relative basis, but likely on an absolute basis as well.

While there are no guarantees, investments made today likely raise the prospects for a greater harvest down the road.