Slowdown in Cash Flow to Funds Could Put Winter Chill on Rally
Individual investors may be growing more reluctant to buy into the stock market’s latest surge, and that is raising fresh concern about the rally’s near-term outlook.
In a report Tuesday on October mutual fund purchases, the funds’ chief trade group said net new cash flow into stock funds fell to $13.5 billion last month, down 22% from $17.4 billion in September and the second-lowest monthly total this year.
And with November nearly over, some major fund companies say their stock fund inflows this month aren’t significantly higher than October’s levels--even though the rocketing market might have been expected to stir more interest on the part of small investors.
By other estimates, however, fund inflows may have picked up recently. Market Trim Tabs newsletter of Santa Rosa, Calif. estimates that stock fund inflows could reach $20 billion this month overall.
Whatever cash has come in, many fund managers appear to be funneling it quickly into stocks, for fear of missing out on an extended rally. As a result, the average stock fund held just 6.2% of assets in cash reserves at Oct. 31--the lowest percentage since June 1977, the funds’ trade group, the Investment Company Institute, said Tuesday.
The risk as those reserves shrink is that a sudden jump in redemptions could force the funds to dump stocks in a hurry to raise cash.
Indeed, the October data are worrisome because they’re reminiscent of fund industry’s trends in May and June, just before stocks’ violent, but brief, pullback in July.
Because cash is the fuel that makes the market go up, and because mutual funds have become the dominant channel by which individuals buy stocks, cash inflows into stock funds are closely watched as a barometer of the market’s prospects.
In June, after a rash of highly speculative activity in May, particularly in smaller stocks, stock fund inflows fell to $14.5 billion, down 42% from May’s inflow.
In addition, stock funds’ average cash reserves dropped to 6.7% at the end of May, then a 20-year low, as fund managers scrambled to invest incoming cash.
That set the stage for the market’s sudden slump in July, when investors’ concerns about rising interest rates and slower corporate earnings growth triggered heavy selling that drove the Dow Jones industrial average down 10% from its late-May peak to its July low.
Will history repeat, with the Dow on a record streak over the last month, and now 750 points, or 13%, above its May peak?
There is, of course, no shortage of worried Wall Streeters. “It’s gotten to a point where I’m wondering if we are set up for a major top in the market,” said Richard Eakle at research firm Eakle Associates.
Among stock mutual fund investors, apparent nervousness about the market’s heights translated into a jump in redemptions in October that outpaced the rise in new purchases. Net new cash flow, the figure reported by the ICI, is gross fund purchases less redemptions, reinvested dividends and exchanges among funds in the same family.
The ICI data show that while gross stock fund purchases rose 8.2% to $36.8 billion in October from September’s total, total redemptions shot up 28% to $22.4 billion. In other words, more fund investors opted to take some money off the table as the market zoomed ever higher.
*
The ICI won’t report industrywide fund inflow data for November until late December. But among major fund firms, the picture is mixed this month. Vanguard Group, for example, said its stock funds have taken in net cash of $1.4 billion so far this month, down from $1.7 billion in October. Smith Barney and T. Rowe Price both said their stock fund inflows are up just slightly this month.
Elsewhere, Fidelity Investments said its U.S. stock funds have attracted a net $1 billion this month, well up from a minuscule inflow in October. But Fidelity’s inflows in recent months have been hurt by redemptions from its flagship Magellan fund, a lackluster performer this year.
Meanwhile, some smaller fund firms, including Strong Funds and Oppenheimer Funds, report significantly higher stock fund inflows.
Some analysts pointed out that investors have good reason to hold back from new purchases in November and December: Most stock funds pay out annual capital gains distributions at this time of year, and buying a fund just before it makes its distribution means the buyer incurs an immediate tax liability for 1996. “I think that is an element” of the slowdown in fund purchases in November, said John Woerth, a spokesman for Vanguard.
Still, Jessica Bibliowicz, executive in charge of Smith Barney’s funds group, believes that the market’s stunning surge in recent months has indeed made more individuals nervous. But she argues that the trends favoring continued investment in stocks--including low inflation, low interest rates and an aging population--suggest that any slowdown in buying won’t be long-lasting.
“I don’t think investors are done [with stocks], I think they’re just cautious right now,” she said.
SEC Suspends Alliance: In a rare occurrence, the Securities and Exchange Commission on Tuesday suspended trading in shares of Bakersfield-based Alliance Industries Inc., citing concern about spectacular financial claims the tiny firm has made on its Internet home page.
The SEC, ordering a 10-day suspension of trading, said that “questions have been raised about the adequacy and accuracy of information . . . concerning, among other things, Alliance’s projected sales and earnings as well as the valuation of its assets and its business prospects.”
Alliance stock, traded on Nasdaq’s Bulletin Board--the arena for very speculative issues--has soared from $1 earlier this year to a recent peak of $23.25, though its last trade (on Friday) was $17.
The company’s vice president of development, Donald Baillargeon, says there are 24 million shares outstanding and that management owns 14 million of them. But he said Alliance management hasn’t traded any of its stock this year.
The shares, Baillargeon says, have been pumped up by excitement over the firm’s plans for mass cultivation of the paulownia tree, which Alliance calls the world’s “fastest-growing hardwood tree.” The firm claims to have 700 plantations worldwide already licensed to begin growing the tree.
Baillargeon says the SEC is questioning Alliance’s projections, published on its Internet site, that by 2006 sales could reach $1 billion and earnings $420 million as it harvests its trees.
“We have sufficient documentation to back that up,” Baillargeon insists, adding that he expects the SEC to be so satisfied once it examines Alliance that “the result of the inquiry [will] be equal to a ‘seal of approval’ from the SEC.”
As for Alliance’s near-term outlook, Baillargeon estimated that 1996 sales will total just $4 million to $5 million. He declined to estimate earnings. Because of the company’s small size, it hasn’t been required to file earnings data with the SEC, or with anyone else, for that matter.
Alliance’s ongoing businesses, according to its Internet site, now include home building, goat farming, chiropractic clinic franchising, and an advertising operation that produces an investor-oriented TV show that airs in 40 cities--and which, not surprisingly, regularly touts Alliance’s stock.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Waning Appetite?
Net new cash flow into stock mutual funds fell to $13.5 billion in October from $17.4 billion in September, as rising redemptions outpaced new purchases. Stock fund inflows, in billions of dollars:
October: $13.5 billion
Source: Investment Company Institute
