Fund Investors Return to Stocks as Bonds Suffer

Small investors are trickling back into stock mutual funds, despite Wall Street’s wild ride in recent months. But frightened investors continue to exit bond funds, as the pain of declining share prices caused by rising market interest rates overwhelms the lure of higher yields.

The polar difference in investors’ treatment of stock funds and bond funds is reinforcing an idea that fund companies have been loath to discuss publicly: In stock funds, most people at least claim to be long-term investors. But bond funds may just be temporary parking places for interest rate opportunists. If true, that’s a big potential problem for the wounded bond market.

In recent weeks, fund executives say money has begun to flow back into their U.S. and foreign stock funds after a brief interruption in late March, when interest rates rocketed and stock prices dove.

While some of the new cash entering stock funds has been seasonal--individual retirement account contributions for 1993 were due by April 15--many fund firms say stock fund demand has picked up from non-retirement buyers as well.

“The thing that surprised me was that (stock fund inflows) were real strong up to April 15 and then beyond,” said Andrew Ziegler, president of the Milwaukee-based Strong Funds.

Likewise, at the Kemper Financial funds in Chicago, share purchases overall are up in April over March’s depressed levels, thanks largely to improved demand for stock funds, the firm said.

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Purchases of international stock funds have been particularly strong in April at many fund companies, despite the deep declines in Asian, Latin American and other overseas markets this year. That suggests many investors continue to adhere to the concept of buying stocks on dips--not just U.S. stocks, but foreign ones as well.

At the Scudder Funds in Boston, purchases of international stock funds “are booming once again,” said spokesman Gavin Quill. The company’s international funds saw a net $8-million outflow in March (i.e., that was the difference between total purchases and total redemptions in the month), but this month those funds attracted a net $90-million inflow, Quill said.

Even Scudder’s Latin American stock fund, which has dropped about 6% in value this year, has attracted a net inflow of $7 million this month after losing $9 million in March, Quill said.

The Investment Company Institute, which reports total fund cash flows on a one-month-lag basis, issued numbers Thursday showing that stock funds in March still attracted more money than they lost via redemptions, despite Wall Street’s plunge at month’s end. The ICI said net new cash flow into stock funds was $6.7 billion in March, down from $14.4 billion in February.

Bond funds, on the other hand, experienced a huge net outflow of money in March. The funds’ net cash flow was a negative $7.7 billion, a dramatic reversal from the big inflows during much of 1993 and the largest one-month outflow since $8.4 billion fled bond funds in October, 1987.

In April, most fund companies say their bond funds continued to see net outflows, though the pace appeared to slow. Vanguard Group in Valley Forge, Pa., says its taxable (government and corporate) bond funds had a net outflow of $370 million this month, down from a $770-million net outflow in March. But at Scudder, investor redemptions have sliced 3% from taxable bond assets this month, versus a 2.5% drop in March.

The only bright spot in bonds, some fund firms say, is that tax-exempt municipal bond funds’ cash flows turned slightly positive in recent weeks.

Whether any improvement in bond funds’ cash flows is sustainable remains to be seen. With every upward turn in interest rates--and further erosion in bond fund share prices--we may discover that bond fund owners are far more interested in preservation of their capital than in reaping higher interest returns. And if the current $735 billion in bond funds continues to drain away, forcing fund managers to sell bonds, the upward pressure on long-term interest rates may not dissipate soon.

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Briefly: The Securities and Exchange Commission is looking for a new enforcement chief for its Pacific regional office, based in Los Angeles. The post is being vacated by 34-year-old Lori Richards, who becomes executive assistant to SEC Chairman Arthur Levitt in Washington. Starting salary for the L.A. enforcement job: $98,186.

Rushing Out of Bonds

Here are bond mutual funds’ monthly cash flows since Jan. 1993.

Net cash flow (billions of dollars) 1993 Jan.: +10.7 Feb.: +10.7 March: +8.5 April: +10.0 May: +10.2 June: +10.6 July: +13.1 Aug.: +12.7 Sept.: +7.0 Oct.: +10.4 Nov.: +4.1 Dec.: +5.8 1994 Jan.: +11.1 Feb.: +1.1 March: -7.7

Source: Investment Company Institute