January’s Money Market Fund Inflows Show Investor Caution
Faced with an erratic stock market and poor performance overall, equity mutual funds this year are struggling to compete against safe but low-yielding money market funds for investors’ dollars, data released Thursday indicate.
If net new investments into stock funds don’t improve soon--and a growing number of analysts are pessimistic that they will--it could diminish what has been a powerful force pushing the bull market.
Americans put a net $15.7 billion into the nation’s equity funds in January, capping the weakest six-month stretch for stock fund flows since the second half of 1991, according to the Investment Company Institute, the fund industry’s chief trade group.
By contrast, investors poured a net $60.8 billion into money market funds in January and $8.4 billion into bond funds, ICI said.
Although $15.7 billion is a respectable amount for stock funds, it’s modest by the standards of recent Januaries, historically one of the strongest months for investor purchases of stock funds.
Indeed, this marks the second consecutive January with less-than-spectacular stock fund inflows.
And unlike last year, when investors made up for it with an exceptionally strong February, fund investors are by and large sitting on the sidelines this month, fund companies say.
T. Rowe Price, Charles Schwab, and Invesco are among those reporting net redemptions from their equity funds in February. Vanguard Group and Fidelity Investments, however, are reporting inflows.
Industrywide, stock funds were on track this month to lose about $200 million through net redemptions, based on data through Monday, according to the Santa Rosa research firm Trimtabs.com.
In February 1998, stock funds attracted a net new $24.2 billion, meaning that’s the amount by which new purchases exceeded investor redemptions.
Trimtabs believes another $6.4 billion flowed into stock funds on Tuesday, following Monday’s 212-point rise in the Dow Jones industrial average. However, there’s a strong likelihood that much of that money went right back out on Wednesday and Thursday, thanks to consecutive down days in the market.
“February was pretty disappointing, and that can be traced to the choppy market,” said Trimtabs director of research Carl Wittnebert. “I’m curious to see if people are going to put money into stock funds in the absence of a continuing rally in the stock market.”
Not since July 1998, just before stocks slid into a near-bear market, has the industry enjoyed robust cash flows into stock funds.
Although the market has since recovered, analysts are beginning to wonder if stock fund inflows will return to pre-July levels any time soon.
“We are not so optimistic that mutual fund [purchases] will quickly return to the levels of early last year,” said Byron Wien, U.S. investment strategist at Morgan Stanley Dean Witter, in a recent report.
The reasons for this vary.
For starters, though the market rebounded strongly in the fourth quarter, stocks are off to a sluggish start in 1999. Year-to-date, the blue-chip Standard & Poor’s 500 index is up just 1.3%. Small-company stocks are doing much worse. They’re down, on average, about 7% so far this year.
And mutual fund managers aren’t adding much value to this market. According to fund tracker Morningstar Inc., 1,693 of 3,091 U.S. diversified stock funds were losing money year-to-date through Wednesday. Only 25% were beating the S&P.;
“A lot of people think the market follows the [fund cash] flows,” said Leah Modigliani, a U.S. equity strategist with Morgan Stanley. “I tend to think that flows follow the market, which is why you haven’t seen strong flows this year.”
What the industry has seen is a sharp rise in redemptions. ICI data show stock fund redemptions in January surged nearly 60% from last year, while gross new purchases rose 36%.
Also, Wien believes “mutual fund flows may be softer this year because more investors are buying stocks directly.”
Finally, rising interest rates seem to be having some effect on investors’ buying decisions. According to a recent Morgan Stanley study, each 1 percentage point increase in the yield of the benchmark 30-year Treasury bond corresponds to a $2.6-billion decline in monthly stock fund flows.
“Higher interest rates is the kind of thing that discourages people from putting more money into stock funds,” Modigliani said. Higher rates “signal better returns on bonds and cash, and that’s an obvious substitute investment.”
Although the average annualized yield on money funds is just 4.8% currently, many fund investors apparently are viewing safe as better than sorry, given the struggles of many stock funds to post a positive return this year.
Times staff writer Paul J. Lim can be reached by e-mail at paul.lim@latimes.com.
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Playing It Safe
Net new cash inflows to money market mutual funds topped $60 billion in January, suggesting many investors are opting to keep their cash loose rather than commit to stock or bond funds. January cash inflows, in billions of dollars, for four fund sectors:
Money market: +$60.8 billion
Stock: +$15.7 billion
Taxable bond: +$6.4 billion
Municipal bond: +$2.0 billion
* Source: Investment Co. Institute
