Data from FundSource showed that in the December quarter, net fund flows into retail managed funds were positive at $902 million compared to a positive $486 million in the September quarter.
In the 12 months ended December, net funds flow totalled a positive $1.81 billion, a 46% increase compared to 2009.
However, Mr Smith, the principal of Kepler Group Otago, said those figures masked the true situation.
"It is good to see that net funds flow into managed funds is positive. Unfortunately, more than half of the net inflow has gone into cash funds.
"The use of cash PIE funds is simply a holding pattern until there is a clear picture for interest rates and the sharemarket."
Portfolio investment entities (PIEs) had tax advantages for people on high incomes, he said.
Investors were "parking" their money in PIEs while they waited for interest rates to rise. PIEs were offering up to 1% higher interest rates than term deposits, in some cases.
A large increase in the industry's net fund flow, particularly the unit trust sector for the December quarter, was mainly attributable to Kiwibank's latest PIE fund.
Kiwibank was offering 5% return on its PIE with a minimum investment of $2000 and notice of only 32 days to withdraw the money, Mr Smith said. That made it very attractive for people waiting for term deposit rates to rise.
"People think interest rates will get to 7% again. It's never going to happen. You only have to look at the United States sharemarkets rising. Investors are putting their money into shares because the average interest rate in the US is 0.5%."
One of the things that did impress Mr Smith was that one-third of the inflow went into diversified funds. It appeared that New Zealanders were finally getting the message that property was not the only investment available.
The mortgage sector continued to haemorrhage, experiencing a fall in funds flow of -$90 million for the quarter.
Mr Smith that was to be expected as nearly all mortgage funds were being wound up.
FundSource data showed there was a slight change in fund managers' ranking in terms of net funds under management in December. Kiwibank moved up to sixth from seventh and Tower moved down to seventh from sixth.
The top five are: OnePath with $4.2 billion under management; ASB, $3.4 billion; AXA, $3.2 billion; BT, $2.7 billion; AMP, $2.1 billion.
