Fund Investors Wax Conservative After Fed Hikes
With a few tightenings of the national credit spigot, the Federal Reserve Board already seems to have achieved one of its goals for 1994: The central bank has converted more than a few once-high-rolling mutual fund investors into paragons of financial conservatism.
That is apparent in the latest report on fund investment activity from the industry’s chief trade group, the Investment Company Institute. The ICI said Thursday that gross purchases of stock and bond fund shares totaled $40.6 billion in April, down sharply from $53.4 billion in March and even below the pace of $41.1 billion in April, 1993.
Net new cash flow, which measures fund purchases minus redemptions and after adjustment for net exchanges among funds in the same families, was $11.3 billion for stock funds in April, a rebound from March’s depressed $6.6 billion but still below the $11.7 billion of April, 1993.
For bond funds, net new cash flow was a negative $4.8 billion in April, compared to a negative $7.7 billion in March and a positive $10 billion in April, 1993.
The seeming contradiction in the numbers above--gross fund purchases fell between March and April but cash flow improved--actually is easily explained. Overall, investors’ appetite for funds declined sharply in April. But because fewer investors redeemed shares in April than March, net cash flow looks better.
This month, fund companies report a further easing of the panic that had gripped some fund investors in March and April, when markets convulsed because of the Fed’s decision to raise short-term interest rates for the first time in five years. Redemptions are down again in May, and a respectable number of people are buying funds.
But what’s in demand are mostly the kind of stock funds traditionally favored by conservative, long-term investors, some fund companies say. Meanwhile, bond funds--many of which have dropped more sharply in value than stock funds this year--still are losing investors, though at a slower pace than in March and April.
At fund giant Fidelity Investments in Boston, spokesman Neal Litvack says net new cash flow into the company is on track to total $1.5 billion this month, up from $1.3 billion in April. But more than 90% of this month’s cash flow is going into stock funds, Litvack says. Bond funds are basically flat, he says, meaning money coming in is just replacing the money that’s leaving.
Significantly, Litvack says, Fidelity investors also are shying away from small-stock funds and “sector” funds that target stocks of specific industries. Instead, the company’s most popular stock funds this month are conservative names such as the Blue Chip fund and the Puritan fund, which are marketed as long-term holdings for relatively cautious investors.
Similarly, at the Kemper mutual funds in Chicago, the best-selling investment this month is the Total Return fund, a balanced (stock and bond) fund. In contrast, Kemper said that its U.S. Government Securities bond fund has continued to experience modest redemptions.
Small investors’ strong interest in blue-chip stock funds and in balanced funds, while pure bond funds suffer, may not look like evidence of a turn to conservatism. After all, academics would argue that bonds are more conservative investments than stocks, at least in the long run.
But the problem in the bond market by late last year was that almost everyone had come to believe that interest rates only went down. Speculation in bonds was rampant, in large part because many bond owners didn’t even know they were speculating: They really didn’t think they could lose money in bonds.
In tightening credit this year, the Fed had more in mind than slowing the economy. The Fed also wanted to slow the wave of naive money that was inflating stock and bond prices and risking a U.S. version of Japan’s 1989 market bubble.
Mutual fund trends since March show that the Fed has succeeded in injecting a new sobriety into the investing picture. And forced to stop and think about what they’re doing, it appears that many investors in stock funds do indeed comprehend the risks and are comfortable with them, so they’re still buying. The continuing outflow of money from bond funds, however, suggests that many bond owners either didn’t understand bonds’ risks, or finally do understand--and no longer want to be a part of that game.
Staying Flexible
The two fastest-growing categories of mutual funds over the past year, after international, have been flexible and balanced funds--which tend to invest in a mix of stocks, bonds and money market securities.
Assets (in billions)
Fund category April ’93 Now Change Intl. stock $31.3 $83.3 +166% Flexible portfolio 18.2 38.5 +112% Balanced 39.3 60.6 +54% Aggressive growth 92.5 130.0 +41% Growth 145.1 170.0 +17% Growth & income 240.8 280.1 +16% Muni bond 122.6 132.6 +8% GNMA bond 61.6 63.8 +4% Government bond 122.2 104.9 -14%
Source: Investment Company Institute
