Net New Investments in Mutual Funds Are Down

So where’s all the money going?

With consumer confidence on the rise, the economy growing and the blue-chip Dow Jones industrial average up an eye-popping 19% so far this year, you’d think money would be pouring into the nation’s stock mutual funds.

Yet, with the exception of strong “fund flows” at a handful of the largest fund companies, net new investments into equity funds continue to be disappointing.

For the first quarter of this year, they’re down as much as 50%, data released Thursday show.

Net new investments into all mutual funds--including bond and money market funds as well as stock funds--for the quarter are down a stunning 23% from the first quarter of 1998.

So what are investors doing with their money?

“My guess is people are taking some of that money and investing it directly into stocks,” says Chris Brown, a fund analyst at Financial Research Corp., a financial services consulting firm in Boston.

This year’s fund flow data could be the first real evidence that investors, at least on the margins, are taking some of their mutual fund money and investing it directly into the stock market, some fund analysts say.

A. Michael Lipper, president of Lipper Analytical, a leading mutual fund tracking firm, believes that Americans are also spending more money on consumer goods.

But “certainly, some of the money has been sucked into individual Internet securities,” he says.

There are two strong forces tugging at money that would have otherwise gone into mutual funds, says Avi Nachmany, analyst at fund-research firm Strategic Insight in New York.

First, there’s the “speculative bubble,” as he calls it, that is luring investors to try their hand at investing in individual Internet stocks. “Money goes into everything.com,” he says.

Then, there’s what he describes as “an exaggerated sense of anxiety,” which is driving some investors on the opposite side of the spectrum to avoid the stock market altogether.

“You have this intense pull between these two forces,” Nachmany says. And until one or both go away, fund flows into equity funds aren’t likely to return to early 1998 levels, when investors poured $20 billion into stock funds every month.

In March, Americans invested a net $12.7 billion into stock funds, according to the Investment Company Institute, the fund industry’s chief trade group. That was down from the $22.4 billion they invested in March 1998.

This marks the eighth month of disappointing fund flows.

Once again, investors in March yanked more money out of international stock funds than they put in during the month. And “aggressive growth” funds, a proxy for small-company stock funds, were also in net redemptions in March.

Taxable bond funds saw net inflows of $4.8 billion in March, down from $5.5 billion this time last year. Even if investors pump more than $22 billion into stock funds this month--which the Santa Rosa-based research firm Trimtabs.com projects--stock fund inflows would still be off more than 40% from last year’s pace.

To be sure, the nation’s largest mutual fund firms--including Fidelity, Vanguard Group, Janus, Schwab, T. Rowe Price and Invesco--are reporting large amounts of new money this month.

But Financial Research Corp. reports that only handful of funds and fund companies are enjoying most of the net inflows.

Fund companies have noted a rising interest in out-of-favor international stock funds. WHAT But Carl Wittnebert, Trimtabs’ director of research, said there are signs that much of the money going into once-overlooked international and small-company stock funds is short-term “timer” money--that is, money from aggressive traders trying to capitalize on short-term moves in the market.

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Souring on Funds

Net new cash inflows into stock and bond mutual funds dropped sharply in the first quarter, despite strong markets. Net inflows, in billions of dollars:

Stock funds

First quarter 1998: $60.6

First quarter 1999: $30.6

*

Bond funds*

First quarter 1998: $28.2

First quarter 1999: $17.8

* Includes hybrid (balanced) funds, taxable and tax-free bond funds

Source: Investment Company Institute