Growth Slows in Stock Mutual Fund Inflows
Despite a last-minute flurry of investment into stock mutual funds in recent days, many fund companies are reporting a disappointing December--all but assuring that 1998 will go down as the first year since 1994 that growth in demand for stock funds has slowed.
This, even though major market indexes have rebounded dramatically and swiftly from their late-summer slide, with both the blue-chip Standard & Poor’s 500 index and the technology-heavy Nasdaq composite back in record territory.
“It’s clear there’s still some general skittishness” among individual investors, said Carl Wittnebert, director of research for Santa Rosa, Calif.-based Trimtabs.com, which tracks fund flows.
It’s not that investors haven’t been putting new cash into stock funds this year. In fact, gross purchases are up: Through November, gross stock fund purchases totaled $637 billion, up 21% from the same period of 1997, according to the Investment Company Institute, the fund industry’s chief trade group.
But at the same time, many other investors have been cashing out of stock funds. Redemptions totaled $473 billion through November, up 46% from the $324 billion investors yanked in the same period of 1997.
That left net new cash flow into stock funds at $155.6 billion through November, down 26% from 1997’s pace, the ICI said.
Net new cash flow is new purchases adjusted for redemptions and exchanges within individual fund families. In other words, it’s the net change in fresh dollars left with fund managers in a given period.
As more investors have pulled out of stock funds this year, they’ve been plowing money into safer assets since the market began its brief but violent tailspin in late July.
Net cash inflows into bond funds, for instance, just about tripled this year through November, ICI figures show.
Interest in tax-free municipal bond funds has been especially strong, with net inflows increasing roughly seventeenfold, to $14 billion, this year compared with 1997.
The big story for 1998, though, continues to be the cascade of cash into ultra-safe money market funds, which saw net inflows of $34 billion in November alone.
With $244 billion in net new cash inflows through November, money funds are now on track to attract more new money in 1998 than all other fund categories combined.
November did see a pickup in stock-fund investment, ICI data show: Net new cash flow totaled nearly $13 billion. While that was down from $16.1 billion in November 1997, it was well up from October’s net $2.5-billion inflow.
Taxable (meaning government and corporate) bond funds saw net inflows of $6.9 billion in November, up from $4.8 billion in October. Part of the rise was attributable to healthy inflows into high-yield junk funds.
However, many fund companies report that flows into junk bond funds have again declined.
Likewise, stock fund investors also are showing renewed caution in December, many fund companies say. Although cash inflows appear to have strengthened in the last week or so, buyers are, on balance, gravitating toward conservative stock funds while pulling small amounts from foreign funds and largely avoiding small-stock portfolios.
Index funds remain one of the few bright spots, as money continues to flow into passively managed funds that track the S&P; 500. Vanguard Group, the nation’s leading marketer of retail index funds, reports net inflows of more than $1.8 billion into its stock funds in December.
By contrast, both Strong Funds and Charles Schwab, which operates the nation’s leading fund supermarket, are reporting slight net redemptions from their stock funds thus far in December ($79.4 million for Schwab and $130 million for Strong, through Monday).
Fidelity Investments, the largest fund company, reports a flat month for stock funds. And T. Rowe Price Associates reports only slight net inflows.
Of course, some fund investors, knowing that funds tend to make annual capital-gains payments late in the year, may be holding back purchases until 1999, rather than buy an instant tax liability.
Even so, given the renewed strength in leading stock indexes, “this is not what I would have expected to see at all,” said Luke Collins, director of KPMG Peat Marwick’s investment consulting practice in Chicago.
Poor cash flows could speak to the deceptiveness of the stock market’s recovery, with a handful of large growth stocks disguising weakness in the broader market--weakness that individual investors are feeling.
For instance, the Wilshire 5,000 index, which measures the performance of the total U.S. stock market, is up 21.7% year-to-date. But take away the 250 largest companies in the 7,300-stock index, along with Internet shares, and the index is down 1.3%.
“This is just too narrow of a market recovery,” said William Dougherty at mutual fund consulting firm Kanon Bloch Carre in Boston.
He notes that while the S&P; 500 is up 28% this year, the typical stock fund is up only about 7%.
“This means that a lot of people have losses in their portfolios or are seeing only modest gains,” he said. Thus, investors’ relative skittishness about putting new money into funds may be rooted in the numbers they see in their own fund statements--contrasted with the heady returns for major stock indexes.
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Playing It Safer
Net new cash inflows into stock mutual funds have slumped this year, while inflows into money funds and bond funds--viewed as safer investments--have surged. Net cash inflows, in billions, into each sector, through November of each year:
Money funds
1997: $103billion
1998: $244 billion
Stock funds
1997: $212 billion
1998: $156 billion
Bond funds*
1997: $24 billion
1998: $71 billion
* Includes taxable and tax-free funds
Source: Investment Company Institute
