No Place to Hide
With a final shove provided by Thursday’s dramatic stock market sell-off, the average mutual fund that invests in U.S. stocks plunged underwater year-to-date, marking a rare event in the bull market of the ‘90s.
According to preliminary numbers from Chicago fund tracker Morningstar Inc., the average domestic equity fund is down 2.5% this year, counting Thursday--after being up an average of 1.4% just the day before.
Meanwhile, several mutual fund companies--including giants Fidelity Investments and T. Rowe Price Associates--now project slight-to-moderate net redemptions from their equity funds this month, the first time that has happened industrywide since the bear market of 1990.
Is this a sign that individual investors have finally lost patience with stocks?
Not quite, mutual fund companies say.
Though T. Rowe Price has experienced net redemptions in its domestic and international stock funds so far in August--the first time this has occurred in five years--spokesman Edward Giltenan described the level of activity as “negligible.”
And while Trimtabs.com, a Santa Rosa research firm, estimates a net $1.2 billion will be pulled out of equity funds by the end of August--marking the first negative month since September 1990, if the trend holds--its director of research, Carl Wittnebert, cautions that not too much should be made of it.
“This outflow from equity funds is just a drop in the bucket when you consider their net assets,” he said. Overall, investors “have been sitting tight.”
Ironically, some financial planners and market strategists say that is exactly what worries them.
One or two more big market drops like Thursday’s, when the Dow Jones industrial average lost more than 4.2% of its value, may lead such disciplined investors to express remorse, they say.
Not remorse for having bought on recent dips. But remorse for not having shifted more of their equity holdings--either in taxable accounts or in their 401(k) plans--into safer vehicles, such as money market funds or high-quality bond funds, while the Dow was at 8,600, for example, and not Thursday’s 8,165.
And this could lead not to gradual shifting of assets, but a mass exodus from stocks, some planners fear.
Michael Chasnoff, financial planner with Advanced Capital Strategies in Cincinnati, notes: “Bear markets and corrections take you through various levels of emotions.
“The first level is, ‘I’ll buy on the dips.’ The second level is, ‘I’ll reduce my [stock] holdings once the market rebounds a little.’ The third level is, ‘Damn it, I should have gotten out sooner.’ The fourth level is, ‘Just get me out!’ And once you get to the fifth level, people are so apathetic that they just don’t care anymore,” he said.
“We’re somewhere between the second and third stages right now.”
Michael Metz, managing director for equity research at CIBC Oppenheimer and a long-standing bear, thinks two things could now occur that would be detrimental to the resumption of the bull market.
“Investors may be saying, ‘If [the Dow] gets back to 8,400 or 8,500, I’ll sell.’ That really puts a lid on any rally,” he said. Or, if the Dow falls below the psychological 8,000 barrier, mutual fund investors might reach what Metz calls “the capitulation stage.”
“That’s when you realize you don’t know where the bottom is and you have a final cathartic liquidation,” he said.
Among the larger mutual fund companies expecting net redemptions for August are Charles Schwab & Co., John Hancock Funds, in addition to T. Rowe Price and Fidelity.
Through Wednesday, Schwab reported a net $1.87 billion was pulled from its equity funds this month, most of it from portfolios that invest in U.S. stocks. The redemptions were nearly across the board, from aggressive growth funds (which represent a decent proxy for small-company funds) to growth funds to growth and income funds, which are at the conservative end of the equity spectrum.
“It’s a significant number for us,” said Greg Gable, Schwab spokesman. “We haven’t seen one this significant in more than 18 months.”
The only two types of stock funds that saw positive numbers at Schwab were index funds, which attracted a net $122 million in inflows, and so-called flexible portfolios, which invest in a mixture of stocks, bonds and cash.
Almost exactly the same amount was pulled out of Fidelity’s equity funds--$1.8 billion. At the same time, bond funds at Fidelity saw net inflows of $150 million. And investors plowed a net $4.5 billion into money market funds, which are considered even safer than bonds.
This is a far cry from July, when investors plowed a net $19.3 billion into stock mutual funds industrywide, according to numbers released Thursday by the Investment Company Institute, the mutual fund industry’s chief trade group.
In fact, through the end of July, stock funds were enjoying better net inflows year-to-date than at this time last year.
Keith Hartstein, senior vice president of national accounts at John Hancock Funds, did not disclose his company’s actual flows for August, but said: “Equity funds were looking a little ugly this month.”
Indeed, according to Morningstar, the typical domestic equity fund has lost 14.7% since the benchmark Standard & Poor’s 500 index peaked July 17. Since that time, the typical U.S. diversified stock fund has plunged even further--nearly 16%.
Among fund companies reporting positive fund flows so far in August are Vanguard Group, known for its low fees and index funds, and Janus, whose growth funds and international portfolios have been among the best performers over the last year.
Market Shake-Ups:
* Global markets plunged, and the Dow lost 357.36 points. A1
* Are we on the verge of an “ice” bear market driven by deflation? A1
* Beleaguered Russian President Boris Yeltsin is pressured to quit. A1
* Kathy Kristof talks with individual investors who are holding tight. D4
* Bank stocks were among those hardest hit on Russian worries. D5
