Stock Fund Demand Revives; Bond Funds May Be Stabilizing After ’94 Outflows
For a 1994 yearbook theme, the mutual fund industry can’t improve much on Charles Dickens: It was the best of times (for stock funds), it was the worst of times (for bond funds).
The industry closed out 1994 with another round of heavy shareholder redemptions out of bond funds, whose share prices were pummeled all year by rising market interest rates.
But stock mutual funds took in more fresh cash in December than in November, and purchases have continued to rise in January, many fund companies say--a sign that the investing public isn’t yet ready to give up on the stock market.
Overall, statistics released Thursday by the Investment Company Institute, the funds’ chief trade group, show the industry enjoyed net new cash flow of $119.3 billion into stock funds in 1994, second only to the $129.6-billion inflow of 1993.
Bond funds, however, had a record net outflow of $43.5 billion, after taking in $113.7 billion in ’93.
Net cash flow measures new purchases of funds minus redemptions, reinvested dividends and adjustments for exchanges among funds in the same families. Thus, it’s a measure of true new demand--or lack thereof--for funds.
A year ago, the industry was well on its way to new highs in stock and bond fund purchases in 1994, until the Federal Reserve began raising interest rates. As bond fund portfolios were devalued by ever-rising rates, investors began to abandon those funds for money market funds, bank CDs and other, shorter-term investments.
That outflow accelerated late in the year: $10.1 billion flowed out in December, versus $10.9 billion in November and $2.8 billion in August.
Stock funds, however, saw net inflows every month last year, despite dicey markets worldwide. The lowest inflow was $3 billion in November. In December, demand picked up again, pushing net cash flow to $5.4 billion.
And so far in January, many fund companies report another jump in stock fund purchases. Fidelity Investments, for example, says its U.S. stock funds have taken in net cash of $400 million this month, compared to a $150-million outflow in December.
What’s more, many fund companies say their bond fund outflows have shrunk significantly in January and that some bond funds are actually taking in money again--suggesting that small investors believe interest rates are peaking.
Even with the ’94 outflows, bond fund assets were $686 billion at year-end, versus $323 billion in 1990. Stock fund assets total $868 billion, versus $246 billion in ’90.
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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
