Stock Mutual Fund Demand Cools Amid Concerns That Market Is Overpriced

Purchases of stock mutual funds have slowed in September from the high levels of July and August, as small investors have apparently turned more cautious about the market after its run to new heights.

“It’s the first time in a long time that we’ve seen a falloff in new fund” purchases, said Tim Pitts, executive vice president of Oppenheimer Management Corp. in New York. “It’s possible people are starting to think the market is getting a little expensive.”

Indeed, many major fund companies offered less robust assessments of stock fund demand in September, as the Investment Company Institute on Tuesday reported fund data for August.

The ICI, the fund industry’s chief trade group, said “net new cash flow” into stock funds was $13.2 billion in August, off modestly from $13.9 billion in July and $14.1 billion in August, 1994.

Net new cash flow into bond funds, meanwhile, was $674 million in August, up sharply from $42 million in July and vastly improved from the net outflow of $2.8 billion in August, 1994. Still, bond funds have struggled to attract new investors this year as the stock market has soared.

Net new cash flow measures fund purchases minus redemptions, reinvested dividends and exchanges among funds in the same families. It’s a gauge of how much fresh cash is flowing into the funds.

Although many fund companies say stock fund demand is still impressive this month, most report a noticeable drop from August.

Fidelity Investments, for example, said new cash flow into its domestic stock funds was $2.27 billion through last Friday, compared to $3.03 billion for all of August. The firm said its international stock funds are seeing a small net outflow of money this month, as they did in August.

The Vanguard Group of funds said total stock fund inflows are $800 million this month, down from $1.1 billion in August.

Other companies reporting lower September inflows included T. Rowe Price Associates, Franklin Resources and Strong Capital Management.

September tends to be a slow month for stock fund purchases because it’s historically one of the worst-performing months for the U.S. stock market, noted Ralph Greggs, vice president in product development at the New England Investment Cos.

With the market hitting record highs recently, some small investors may be opting to stay sidelined until stock prices come down a bit, analysts say.