Fund Investors Skittish Despite Market Upturn

Despite the stock market’s sharp rebound this month, investors’ appetite for stock mutual funds remains surprisingly low.

Some of the nation’s largest fund companies--including Fidelity Investments, T. Rowe Price Associates and Charles Schwab--say that more money has been redeemed in October from their stock funds than has been put in.

And of those reporting inflows, many--including those whose funds have performed relatively well this year--are reporting rather weak numbers.

Vanguard Group, for instance, says its October stock fund inflows are the lowest it has seen in more than three years. Janus says new purchases have outpaced redemptions by $109 million, but that is about one-sixth September’s inflow.

This despite the fact that stock markets worldwide have resurged this month. The Dow Jones industrial average, up 123.06 points to 8,495.03 on Thursday, is up 8.4% since Oct. 1. Since the end of August, the Dow has regained about half the losses it incurred during the summer market plunge.

To be sure, some fund companies report that investors started to return to stock funds in the latter half of this month, after the Federal Reserve Board cut short-term interest rates for a second time.

“You really had a tale of two months,” said Anne Crowley, a spokeswoman for Fidelity, which saw a net $1.5 billion pulled out of its stock funds this month. “With the first half of the month, you had market volatility and people were predominately going into conservative investments.

“In the second half of the month, people still favored conservative investments, but for the first time, there was also [renewed] interest in stocks,” she added.

Still, financial planners and fund experts said the overall cash flow trends reinforce their suspicions that small investors are still extremely skittish about the market.

“This shows that there’s still concern about volatility,” said David Masters, senior mutual fund analyst at Standard & Poor’s Micropal in Boston. “And it’s quite considerable.”

Added Carl Wittnebert, director of research for the Santa Rosa, Calif.-based research firm Trimtabs.com: “For years, there was money going into the market regardless of what it was doing. I think that’s pretty much slowed down.”

Wittnebert recently cut nearly in half his estimate for October stock fund inflows overall, from $9.6 billion to just $5.1 billion. If he’s right, that would represent a nearly 75% drop-off from October 1997 inflows.

It would also represent a 22% drop from September’s inflows: After yanking a net $11.7 billion out of stock funds in August as the market plunged, investors put more than half that back in during September, according to figures released Thursday by the Investment Company Institute, the fund industry’s chief trade group.

But September’s net inflow--about $6.5 billion--represents only a fraction of the $25.3 billion put into stock funds in September 1997.

Some of the drop-off in stock fund demand could be seasonal.

Investors often sell losing funds at this time of the year to offset winners, for tax purposes. And because many funds make annual capital gains distributions in the final months of the year, many investors refrain from buying before those distributions are paid, to avoid purchasing an automatic tax liability for the year.

But that can’t be the only explanation for this slowdown in new stock fund investment, financial planners and fund companies say.

They note that although fund inflows slowed last fall, October 1997 still saw a net inflow of about $19 billion to stock funds.

And fund companies aren’t reporting many additional tax-related inquiries this year versus last year.

Meanwhile, of the $5.1 billion that is believed to have flowed into stock funds in October, only $600 million of that went into international stock funds, Trimtabs says.

This continues a recent trend away from international investing, something analysts say is not surprising in light of heavy losses investors experienced in emerging markets and Asia in the last year.

If stock fund inflows are disappointing, bond fund inflows remain fairly steady, as investors tilt toward “safer” securities.

Investors in September continued to be net buyers of bond funds, which experienced decent inflows of about $5.6 billion, ICI said. That’s about the same as in August.

Once again, high-quality government bond funds led the way, with net inflows of about $2 billion in September.

Higher-risk junk bond funds in September saw net inflows of just $335 million. Still, that was an improvement from August, when high-yield funds suffered net outflows of $3.4 billion, as investors fled high-risk securities of all types.

Trimtabs now believes investors pumped about $1.3 billion into high-yield funds in October. That’s still down from the $1.8-billion monthly inflows junk bond funds were averaging in the first half of this year.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Tracking Fund Cash Flows

Stock mutual funds took in $6.5 billion in net new cash in September, an improvement from August’s net outflow but still well below the inflow of September, 1997. Bond funds’ September net inflows, have been steady but below levels earlier in the year. Monthly figures, in billions of dollars:

STOCK FUNDS

Sept., 1998: $6.5 billion

BOND FUNDS

Sept., 1998: $5.6 billion

* Source: Investment Company Institute