Cash Flow Into Mutual Funds Off 39% in June

The amount of cash flowing into mutual funds tumbled 39% in June, an industry group said Wednesday in a report that some investors interpreted as a bad omen for the nearly 6-year-old bull market.

The Investment Company Institute, a national association of mutual fund companies, said net new cash flow into all types of funds--stock, bond and income--was an estimated $15.5 billion in June, compared with $25.5 billion in May.

The number measures the amount of cash that Americans put into mutual funds minus the amount that was withdrawn.

The drop may reflect a slowdown in retirement-related investment activity that bolstered the amount of money flowing into funds in the early part of the year, the group said.

But the timing of the slowdown did not coincide with the mid-April tax deadline, when contributions to individual retirement accounts are due, it said, noting that other factors may have contributed to the reduced rate of investment in June.

John Rea, the group’s chief economist, said a more uncertain outlook for stock prices may have been a factor, as expectations have grown that the Federal Reserve Board would raise interest rates as a hedge against inflation. Higher rates would slow the economy and presumably hurt corporate earnings, thus depressing stock prices.

Despite the slowdown in June, the flow of cash into stock funds for the first half of the year was an estimated $138.5 billion, surpassing the annual record of $129.6 billion set in 1993, the group said.

Some analysts said the report was a clear threat to the stock market, whose bull run began when the Dow Jones industrial average stood at about 2,365 in early October 1990.

“This is very ominous,” said Michael Metz, the chief investment strategist at Oppenheimer & Co. “It was inconceivable that we could maintain that rate of inflow” in the first five months of the year.

Metz noted that $20 billion to $25 billion had been coming into mutual funds month after month.

“We have eroding fundamentals like rising interest rates, perhaps rising inflation and perhaps flattening profits. It spells the end of the bull market.”

Other analysts took a less dim view.

“It’s not the end of the bull market by itself,” said David Shulman, chief stock strategist at Salomon Bros.

He said $15 billion “is still huge,” adding that June was a seasonally slow month for mutual funds. People may have been thinking more about vacations than investments, he suggested.

Some analysts have said the strong pace of cash flowing into mutual funds, fueled in part by baby boomers planning for retirement, has bolstered stock prices as portfolio managers looked to put the money to work.

Michael Lipper, president of Lipper Analytical Services, said the recent volatility in smaller stocks and technology shares was “giving some investors an excuse not to invest.”

He noted that the rate of money flowing into mutual funds has been declining in dollar terms since January.

Brian Mattes, a spokesman for the Vanguard Group, the nation’s second-largest fund family, attributed the slower pace to both seasonal influences and the stock market’s pullback.

Stock mutual funds had a net increase of $15.5 billion in new cash in June after $25.16 billion in May. The cash moving into bond and income funds was flat in June, compared with about $320 million of new cash in May, the group said.

The slowdown in net flow to stock funds last month was concentrated in domestic funds of all major types, Rea said.

Fidelity Investments’ Magellan Fund, the nation’s largest mutual fund, alone lost $800 million during the month of June in withdrawals by shareholders, according to an estimate by Eric Kobren, executive editor of Fidelity Insight, a Wellesley, Mass.-based independent newsletter that tracks the firm. That follows withdrawals of about $1 billion of assets in May, he said.

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Buying Slows

Investors’ net purchases of stock mutual funds fell to an estimated $15.5 billion in June, the slowest yet this year. But that still is nearly double the level of June, 1995. Monthly net inflows, in billions:

June 1996: $15.5*

* Estimate

Source: Investment Company Institute