Investors Flee International Stock Funds, Shy From Domestic Funds

The financial market rout that started in Southeast Asia and spread to Latin America is causing U.S. mutual fund investors to flee international stock funds and slow their purchases of domestic stock funds.

Investors have withdrawn cash from international stock funds for five consecutive weeks and have redeemed money from funds that focus on Southeast Asian stocks at a rate of $220 million a month, according to research groups that track mutual fund flows.

As for funds that concentrate investments in U.S. stocks, the pace of buying has slowed to about $2.7 billion a week over the last month, down from a rate of almost $5.1 billion a week in September, according to Trim Tabs Financial Services Inc., which tracks fund flows.

The Investment Company Institute, the mutual fund industry’s trade group, reported Thursday that an estimated $21 billion was invested in all types of stock funds in October, down nearly 19% from $25.8 billion in September.

Bond and fixed-income funds attracted an estimated $3 billion in October, compared with $3.62 billion in September, the ICI reported.

October’s international outflows were outweighed by $198 million in domestic fund inflows. Domestic fixed-income products took most of it, with about $114 million in inflows.

“Investors are really spooked by what’s happening to the world’s markets,” said Ian Wilson, editor of Micropal Emerging Market Monitor in Richmond, Va. “When you see Brazil’s market go down 10% in a day and Hong Kong’s market go down 14% in a day, that leaves investors wondering whether they should just leave their money in the bank.”

That sentiment is exacerbated as investors see the returns of their emerging markets funds eroding at a horrific rate.

Funds such as T. Rowe Price Associates Inc.’s Latin America Fund has lost nearly 32% of its value in three weeks and Fidelity Investments’ Emerging Markets Fund has fallen more than 40% since early July.

Several Southeast Asian funds lost more than 30% of their value over the last month, including the Wright Equifund Hong Kong Fund, the Fidelity Hong Kong & China Fund, the Montgomery Emerging Asia Fund and the Guinness Flight China & Hong Kong Fund.

Fund companies, including Fidelity, T. Rowe Price, Charles Schwab Corp. and Scudder, Stevens & Clark Inc., reported net withdrawals from international equities funds last month.

Investors have been steadily withdrawing cash from international funds for the last six weeks, said Gavin Quill, Scudder’s marketing vice president.

“The money is being diverted primarily to conservatively managed U.S. equity funds and secondarily to money market funds and high-yield bond funds,” Quill said.

U.S. stock funds are luring investors. So-called growth stock funds attracted a net $353 million last month and an additional $96 million so far this month, Gable said. The level of buying is on par with previous months, he said.

Vanguard Group, the second-biggest U.S. fund company, bucked the industry trend in October by reporting an increase in equities funds net inflows.