Stock and Bond Mutual Funds Drop $4.7 Billion in December Rush to Redemption

The $2.1-trillion mutual fund industry in December suffered one of its worst setbacks since the stock market crash of 1987, as investors bailed out of bonds funds and toned down their stock fund purchases.

With interest rates rising and Third World stock markets collapsing, investors withdrew a net $4.7 billion from stock and bond mutual funds in December after a $7.9-billion cash outflow in November, according to the Investment Company Institute.

Net new cash flow--net new purchases of funds minus redemptions, reinvested dividends and adjustments for exchanges among funds--amounted to a positive $5.4 billion for stock funds in December, compared with $3.0 billion in November and $14.7 billion in December, 1993.

But bond funds saw another big outflow: Net new cash flow into those funds was a negative $10.1 billion in December, compared with a negative $10.9 billion in November and a positive $5.8 billion in December, 1993.

For all of 1994, net new cash flow into stock funds reached $119.3 billion, compared with a record $129.6 billion in 1993.

Net new cash flow into bond and income mutual funds reached a negative $43.5 billion--a record outflow--compared with a positive $113.7 billion in 1993.

Not since 1983 has fund industry growth been so anemic. The assets of all mutual funds rose only 4.3% in 1994, to $2.164 trillion. It was the lowest growth rate since assets fell 1.3% 11 years ago, the ICI reported.

“Last year was a rout that got worse and worse as the year went on” for many fund sectors, said John Rekenthaler, editor of Morningstar Mutual Funds.

Fidelity Investments, the nation’s biggest fund company, and Vanguard said redemptions exceeded new sales in December. Vanguard said it saw more redemptions than in any one-month period since the stock market crash of 1987. Fidelity said about $900 million was pulled from its mutual funds in December.

Fidelity said investors are redeeming money from bond funds again this month, while the firm’s stock funds have attracted $200 million so far in January.

Total assets of stock and bond funds reached $1.553 trillion at the end of December, compared with totals of $1.549 trillion in November and $1.510 trillion in December, 1993.

Assets of short-term funds (money market funds, including both taxable and tax-exempt) increased to $611 billion at the end of December, from $607 billion in November and $565 billion at the end of December, 1993.

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Mutual Funds: One Boom, One Bust

Stock mutual funds continued to attract near-record new investment last year. But bond funds experienced a record net outflow as interest rates surged. Net new cash flow, in billions of dollars:

Stock funds: +$119.3

Bond funds: -$43.5

Source: Investment Company Institute