Investors Shy Away From Stock Funds

Investors’ net purchases of stock mutual funds have slumped this month from July’s near-record pace, while money is moving to low-risk money market funds amid increasing concern about falling equity markets.

The research group Trim Tabs Financial Services, which tracks industry money flows, on Thursday estimated that equity funds have attracted just $9 billion in net new cash in August.

If accurate, that would be down two-thirds from the $26.6 billion invested in July--a figure reported Thursday by the Investment Company Institute (ICI), the funds’ chief trade group.

Trim Tabs’ figure suggests that investors have turned warier of the stock market than at any time since last summer.

And if new cash flows to the funds dry up, that could remove a key prop for the bull market, analysts warn.

Many major fund companies confirmed on Thursday that while investor demand for stock funds soared in July as share prices continued to rocket, net purchases have dropped off sharply this month as blue chip stocks have tumbled and market volatility overall has surged.

All of the fund groups surveyed on Thursday by Bloomberg News reported lower stock fund inflows this month, with declines ranging from 15% to 65% compared with July figures. Fund companies also reported that more investors are socking cash away in money funds, which are perceived as a safe harbor amid dicey markets.

Fidelity Investments, the biggest U.S. fund company, reported that five of its top 10 selling funds are money market funds this month. No. 2 Vanguard Group said its money funds attracted about $470 million in August, up from $395 million last month.

“It’s an indication some investors are concerned about market volatility,” said John Woerth, Vanguard’s spokesman.

Meanwhile, Vanguard said stock fund net purchases this month have totaled $2.2 billion, down from $3 billion in July. Fidelity said stock fund inflows have declined to about $1 billion in August from $2 billion in July. But the company’s flagship Magellan Fund attracted net inflows during the month, the first time that has happened since early last year.

At Charles Schwab Corp., net inflows to stock funds have sunk to $840 million in August from $1.65 billion in July, the firm said. The slowdown was especially apparent for funds investing in non-U.S. stocks, a spokeswoman said.

Denver-based Janus Capital Corp. said its stock funds, led by Janus Worldwide, have attracted about $326 million so far this month, down from $991 million in July.

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The decline in cash inflows may have caught some stock fund managers by surprise: ICI data for July show that the average stock fund had just 5.6% of assets in cash at July 31, down from 5.8% in June and the lowest since December. That suggests that many managers put money to work in stocks as fast as they received it in July--leaving only a thin cushion of cash, should investor redemptions of fund shares rise.

Although more investors may have turned fearful of stocks this month, ICI data suggest that many investors were already hedging their bets in July--even though stock fund inflows were the third-heaviest ever.

ICI said money funds took in $15.2 billion in net new cash in July, up from $1 billion in June.

And bond mutual funds had net inflows of $4.2 billion in July, up from $2.1 billion in June.

Net cash inflows are total fund purchases minus redemptions, and plus or minus net exchanges among funds in the same family.