Stock Fund Buyers Apply the Brakes

U.S. equity funds are attracting new investments at the slowest pace in almost a year on concerns the stock market will fall if the Federal Reserve Board raises interest rates soon, a fund company tracking firm reported Tuesday.

When investors do buy equity funds, they’re putting assets in conservatively managed or international funds rather than risky ones such as “aggressive growth” funds, companies said.

Some of America’s biggest fund groups, including Vanguard Group, T. Rowe Price Associates Inc. and Janus Capital Corp., said stock fund inflows were about the same in April as March, when the Investment Company Institute reported $10.51 billion was invested.

“Stock fund inflows are way off the record levels of January and February,” said Ralph Greggs, vice president of product development at New England Funds LP in Boston.

The March inflows were the lowest since July, when an estimated $5.75 billion went into stock funds, and April looks no better, the ICI reported.

Concerns about the Fed raising interest rates resulted in net outflows for bond funds in March. The ICI said that $1.99 billion was pulled from bond funds last month, compared with about $2.17 billion of inflows in February and about $3.4 billion of inflows in January.

Companies said bond funds suffered net outflows in April as well. Money was also pulled from money market funds this month as Americans used cash from these accounts to help cover their tax bills.

The month of April tends to be one of the best months for net inflows because April 15 is the deadline for making tax-deductible contributions to Individual Retirement Accounts for the previous calendar year, the ICI reported.

Charles Schwab Corp. said stock funds purchased through its OneSource supermarket program totaled about $540 million this month, which was about a third what was invested last April, Schwab spokeswoman Tracey Gordon said. This month’s inflows were higher than they were in March, when a net $340 million was invested.

Fidelity Investments said its stock funds attracted a net $1 billion in April, led by new investments in its Growth & Income, U.S. Equity Index and Low-Priced Stock funds. It’s the first time in recent history that the Fidelity index fund made the company’s top-selling list.

OppenheimerFunds Inc. was one of the few firms to report robust net inflows during the month.

“We’re benefiting from IRA season and investor interest in more conservative funds like ‘balanced’ funds,” said Tim Pitts, the firm’s executive vice president. “We’re having a record month as about $1.1 billion went into our stock and bond funds.”

Most companies reported that concerns about the Fed and the markets are resulting in lower-than-normal inflows.

Some analysts expect that the Fed may move next month to raise rates for a second time this year in an effort to slow the economy. The Fed, which next meets May 20, raised the target for overnight lending between banks by a quarter of a percentage point to 5.5% in March.

U.S. stocks and bonds rose, however, as a smaller-than-expected rise in labor costs eased concern the Fed is poised to boost rates again soon. The Dow Jones industrial average surged 179.01 points to 6,962.03, the second-biggest advance ever. Bond prices rose.

“Still, a lot of investors are concerned that if the Fed keeps raising rates, the bull market of the past 6 1/2 years will end,” said Charles Biderman, head of Trim Tabs Financial Services Inc., an investment advisory firm in Santa Rosa.

Investors put an estimated $7.5 billion into stock funds this month, Biderman said. That would be about 26% below March, he said.

Vanguard Group reported its stock funds attracted about $1.8 billion this month, or roughly the same as March. The company’s low-cost “index” funds remain the most popular, said Vanguard spokesman Brian Mattes.

In the first quarter, net inflows to stock funds totaled $57.75 billion, down 20.4% from $72.54 billion in the same period last year, ICI reported. Bond funds attracted $3.87 billion in the three-month period, about half the previous year’s level.