Cash Flow Into Stock Funds Off 38% in June
The flood of cash into stock mutual funds is slowing significantly, raising more questions about the weakened bull market’s health in the near term.
The fund industry’s chief trade group on Wednesday estimated that net new cash flow into stock funds plunged to $15.5 billion in June, down 38% from $25.2 billion in May and the lowest monthly total this year.
Moreover, some fund companies report that stock fund purchases have slowed further in July. And some fund-tracking services estimate that there has been a heavy net outflow of money from aggressive-growth stock funds in recent days, as more investors have apparently opted to take profits after the funds’ big gains in the first half.
Wednesday’s estimate of June net stock fund purchases, a regular monthly report from the Investment Company Institute, wasn’t a total surprise because many fund firms in June had confirmed that demand for funds was declining.
But the report, which is subject to revision in about two weeks, comes at a time when stock prices in general are sliding, as investors worry about slowing corporate earnings growth and the potential for the Federal Reserve Board to tighten credit to fight early signs of rising inflation.
The Wilshire 5,000 index, the broadest measure of the U.S. market, has fallen 4.6% from its recent record high.
Because the stock market’s surge earlier this year was in large part fueled by record sums of cash channeled from individual investors to stock fund managers and then into the market, the fear now is that any decline in fund inflows will mean less cash available to bid for stocks even as they weaken.
Analysts also note, however, that even though the estimated June stock fund inflow of $15.5 billion was well below May’s total, it still would be nearly double the inflow in June 1995.
“There is still heavy demand for equity-related securities” from individual investors, said John Rea, economist at the ICI.
Even so, he conceded that lower demand in June may reflect that “the outlook for stock prices perhaps became more uncertain” from small investors’ point of view, as interest rates have continued to rise and the focus has shifted to a possible Fed tightening.
The cash inflow figure measures net fund purchases after adjusting for fund redemptions, reinvested dividends and exchanges among funds in the same family.
Fidelity Investments, the biggest fund company, experienced one of the most dramatic declines in stock fund inflows in June. The firm said it took in a net $500 million, versus $2 billion in May.
But Fidelity has been plagued by bad publicity over its flagship Magellan stock fund, whose manager, Jeff Vinik, resigned in the spring in the wake of the fund’s poor recent performance. Fidelity has confirmed that there have been large cash outflows from Magellan.
In addition, a Fidelity spokeswoman said Wednesday that many of the firm’s customers appear to be building up cash in money market funds rather than adding to stock fund accounts. “Investors are turning more cautious,” she said.
Among other fund companies, State Street Research and Massachusetts Financial Services said stock fund purchases slowed in June and have continued to slip this month.
But several other large fund firms, including Vanguard Group and T. Rowe Price Associates, said Wednesday that stock fund purchases so far in July are at least matching June levels.
The stock fund sector that appears to be fading fastest in terms of investor demand is the aggressive-growth category. Those funds typically buy smaller stocks, which were red-hot in spring but have tumbled over the last month.
Mutual Fund Trim Tabs, a Santa Rosa, Calif.-based newsletter that tracks fund flows, said investors pulled a net $314 million out of the aggressive-growth funds it tracks between last Friday and Monday--as the market reeled in the wake of a strong June employment report that sent bond yields soaring.
That outflow was the biggest yet this year, the newsletter said, and suggests that more nervous investors are taking profits after the funds’ hefty first-half gains.
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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
