Cash Exits Stock Funds as Performance Wanes

Individual investors are on track to pull more money out of stock mutual funds in February--$2.1 billion more--than they’re expected to put in, according to industry estimates.

The news comes as a surprise, since in recent years February has been a strong month for net new investments in equity funds. And it comes on the heels of a strong January for mutual fund inflows, based on unofficial results. Official January flow figures are expected to be released next week by the Investment Company Institute, the fund industry’s chief trade group.

Several mutual fund companies are reporting a dramatic slowdown in net new investments into their stock funds this month. Some companies, such as Charles Schwab, are reporting outflows from their stock funds so far this month, while others, such as T. Rowe Price, are reporting only modest inflows.

Investors are unnerved by the erratic market--and are unimpressed with their mutual fund performance, fund analysts said.

“It’s market performance,” said Carl Wittnebert, director of research for Santa Rosa, Calif.-based research firm Trimtabs.com, which estimates a $2.1-billion outflow for February. “Most funds are now down for the year, whereas last year there was a big rise in the beginning of the year.”

As of Thursday, 4,351 of the nation’s 5,882 stock funds were losing money year-to-date, according to data tracker Lipper Inc.

To be sure, there is still ample time for this month’s fund flows to reverse themselves. However, even a last-minute buying spree is unlikely to bring February’s net inflows anywhere near Trimtabs’ January estimate of $19.6 billion or the net $24.2 billion that poured in last February. January and February are traditionally strong months for inflows, in part because investors often begin maximizing contributions to tax-deferred accounts such as 401(k)s and IRAs.

International stock funds and small-company stock funds continue to suffer in this market.

Trimtabs measures small-company stock fund flows by tracking 14 small-capitalization stock funds, with a total of roughly $5.7 billion in assets. This month, investors are on track to redeem a net 3.5% of these funds’ assets. To put that into perspective, investors redeemed, at most, only 1.4% of small-cap fund assets in any month in 1998, a year in which small-cap stocks slid into an official bear market, meaning a 20% drop.

The situation is unlikely to improve until the Russell 2,000 index of small-company stocks, which is off 7% year-to-date, reverses course and begins delivering positive returns, analysts said.

Gerald Perritt, editor of the Mutual Fund Letter in Largo, Fla., said fund investors aren’t as patient as they were a year ago when it comes to their own funds’ performance.

This impatience will be put to the test in coming months, when one-year performance numbers for many funds will probably worsen because of last year’s huge early market surge.

In 1998, the Standard & Poor’s 500-stock index of blue chips rocketed more than 16% in the first four months. This means that as this year rolls on, it will be that much harder to post strong one-year performance figures, since total-return comparisons will be calculated from a relatively high base (at least until April 17, when the broad market peaked in 1998).

“As that bubble passes through the snake, you’re going to see a lot of [funds] down for the year,” Perritt said.

Not all fund companies are experiencing a slowdown, however. Vanguard Group and Janus, whose funds have been on a performance tear recently, continue to report strong flows into their stock funds.

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Stock Fund Cash Flows

After pouring money into stock mutual funds in January, individual investors appear to be holding back in February, during which the benchmark Standard & Poor’s 500 index of large stocks and the Russell 2,000 index of small-company stocks have so far lost ground so far.Net new cash flows into equity funds in billions of dollars:

February*: -$2.1 billion

* Estimated figures, according to Trimtabs.com

Source: Investment Company Institute