Cash Returns to Stock--Not Bond--Funds

Small investors’ hunger for stock mutual funds is increasing again, but demand for bond funds remains withered in the face of higher interest rates, fund companies say.

Spot reports from major fund sponsors show that public demand for stock funds has risen this month, though many companies say the increase is “moderate” so far.

Given the rally in stocks last week, however, fund purchases are expected to accelerate into September as investors gain more confidence in the market.

Fidelity Investments in Boston, for example, said its net cash flow into stock and bond funds is up $100 million this month from July levels, to $650 million, with all of the increase on the stock side.

At Denver-based Janus Funds, which is mostly a stock fund manager, cash flow is up 16% to $274 million in August compared to the same date in July, a spokeswoman said.

Boston-based Scudder Funds describes stock fund purchases as moderately above July levels.

Nonetheless, July was a surprisingly good month for stock fund activity, and this month’s increase in purchases could return the industry to the hefty cash-flow levels last seen in the spring.

The Investment Company Institute, the trade group for the funds, reported Monday that net new cash flow into stock funds totaled $9.25 billion in July, up from $7.7 billion in June. Net new cash flow measures fund purchases minus redemptions and reinvested dividends and adjusted for exchanges among funds in the same family.

Despite global stock markets’ gyrations this year, investors have continued to pour money into stock funds, especially international funds.

At Scudder, cash flow into international funds this month is running at three times July’s level, spokesman Gavin Quill said.

He attributed investors’ overall increase in demand for stock funds this month to the markets’ relative calm in July and early August. “We find that sustained stability is the only thing you need to bring people back to” stocks, Quill said.

Not so for bond funds. Most fund companies say outflows from bond funds, especially Treasury bond funds, continue. The pace has slowed since spring, but few fund sponsors see any sign that investors will become big buyers of bond funds again anytime soon.

Many investors who had relied on bond funds for income no longer see a need to risk principal in such funds, given that short-term interest rates have soared, experts say.