Fund Investors Showing Caution

The day after the Dow Jones industrial average fell more than 554 points last October, individual investors plowed a net $684 million into the equity mutual funds through discount broker Charles Schwab & Co.

Was there similar heavy buying Wednesday, after Tuesday’s market plunge?

Schwab officials won’t have the official numbers until this morning, but by most indications from the fund industry, the answer is likely to be a resounding no. Many fund investors seem to be in a much more cautious mood this time around.

And that might be particularly troublesome for small-company stock funds. With small stocks down sharply, these funds ought to be poised to take advantage of the biggest bargains in the domestic equity universe. But many of the funds can’t afford to buy into this dip because retail investors are being stingy with their dollars.

“The biggest problem remains the supply of money into these small funds,” says Prudential Securities small-cap analyst Claudia Mott. “These small-cap managers are running with low cash, getting hit with redemptions, and they’re having to sell stocks they don’t otherwise want to just to meet those redemptions.”

“Imagine, they’re faced with a down market and they’re having to sell stock, rather than buying into it,” she says.

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According to Trimtabs.com, a Santa Rosa-based research firm, a net $1.2 billion flowed out of U.S. equity funds Tuesday as the Dow dropped nearly 300 points, the third worst single-day point-loss on record.

Amazingly, aggressive growth funds, the best proxy for small-cap portfolios, saw the same amount of net redemptions on that day. So, if not for investors fleeing aggressive growth, money flows into and out of domestic equity funds overall were pretty much a wash.

Indeed, growth funds saw a net $104 million in outflows Tuesday while growth and income funds--which tend to favor blue-chip stocks--saw a net inflow of $113 million, according to Trimtabs.com.

If small stocks’ performance Wednesday was any indication of investors’ interest in the funds that own those stocks, aggressive growth funds might not have fared well Wednesday, either. The Russell 2,000 small-cap stock index fell another 0.7% on Wednesday, even as blue chips rallied. The Russell index now is down 8.8% year to date.

Throughout the country, mutual fund investors continued to view the market with caution, rather than rushing in after Tuesday’s plunge, many fund companies said Wednesday.

Vanguard Group, for instance, reported that its investors took as much money out of equity funds--either through redemptions or exchanges--as they plowed in. That marked the second consecutive flat day.

And while phone call volume Wednesday was measurably higher than on Tuesday, in particular toward the market’s close, “it was almost exclusively people checking their account balances rather than moving their money,” says Vanguard spokesman Brian Mattes.

T. Rowe Price officials had to deploy additional phone representatives to handle increased call volume in the early-morning hours Wednesday, when the market initially sank.

Spokeswoman Rowena Itchon said, “Relative to most days, there was higher-than-normal switching from equities to money market funds.” Still, she said the firm would not know until this morning whether its equity funds saw a net inflow or outflow Wednesday.

Schwab officials say they fielded 88,000 calls Wednesday, up from the 60,000 to 70,000 calls the firm receives on a normal summer day.

Schwab said investors pulled a net $268 million out of equity funds Friday, $130 million Monday and $331 million Tuesday.

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Fund Damage, So Far

The recent market pullback has slashed nearly 10% from the typical growth stock fund, according to Lipper Analytical. Small-stock funds, meanwhile, have been hit much worse. But no fund category has neared the losses experienced in the 1990 bear market.

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Fund index Recent peak to Wed. 1990 bear mkt. loss Equity income --7.8% --15.9% Growth and income --8.6 --17.3 Growth --9.8 --20.7 Capital appreciation --10.7 --21.3 Small cap --17.0* --27.9

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*Decline measured from April 21, peak in small-stock market; other declines measured from July 17, peak in S&P; 500 index.

Source: Lipper Analytical