Net New Mutual Fund Inflows Are Falling Off Markedly in May

Falling stock prices, rising interest rates and rising interest in online trading took their toll on mutual funds in May, as net new investments into stock funds have fallen off considerably.

According to preliminary, unofficial figures, investors are on pace to put just $5 billion in net new money into stock funds this month, according to research firm Trimtabs.com of Santa Rosa, Calif.

Compare that with April, when investors poured more than five times as much, or $25.5 billion, into stock funds, representing the largest monthly “inflow” in a year.

Of course, analysts point out that in April, not only did the stock market soar, stock market leadership broadened to include small stocks, emerging-markets stocks and even so-called value-oriented investments.

What’s more, April is traditionally a strong month for fund inflows, as investors race to make IRA contributions for tax purposes.

In the first two weeks of May, it appeared as though stock funds were headed for another strong month. But on May 14, reports of a sharp jump in the consumer price index--the most common measure of inflation--sent interest rates up, stock prices down, and stock fund flows down with them.

“The CPI just tore everything apart,” said Carl Wittnebert, Trimtabs’ director of research.

Indeed, until May 13, Trimtabs had been projecting a net inflow of $27 billion. Last week, those projections were reduced to $13 billion. As of Thursday morning, they had fallen to $9.7 billion.

Factoring in the 235-point drop in the Dow Jones industrial average on Thursday, Wittnebert now believes that fund flows for May will come in closer to $5 billion.

The timing couldn’t have been much worse for funds that invest in small stocks, emerging markets stocks and value stocks--once out-of-favor sectors that have bounced back to life in recent weeks.

Chris Brown, a fund analyst at Financial Research Corp., a financial services consulting firm in Boston, notes that it normally takes at least a month before fund investors spot moves in stock market sectors.

And in fact, fund companies began reporting increased interest in small-stock funds and value funds only toward the middle of this month--just before investors began pulling money from mutual funds.

Two other bad signs for fund companies:

Thus far in May, the combined net inflows into stock funds at Vanguard Group and Fidelity Investments is $5.9 billion. That means combined, the two largest fund companies seem to have accounted for more than 100% of net inflows into all the nation’s stock funds this month. In other words, most funds and fund companies aren’t attracting any new money--or worse yet, are in net redemption.

In addition, stock fund inflows for the first five months of the year would total around $60 billion, representing the weakest start to a year since 1995. Worse still, money that would have gone into stock funds doesn’t appear to be going into other types of mutual funds. Through April, net inflows into all forms of mutual funds combined--including stock funds, bond funds and money market funds--have fallen by a third over the like 1998 period to $120.1 billion.

Financial Research Corp. estimates that last month, a net $8.3 billion was pulled from all forms of funds combined. Although much of that money was pulled to help pay taxes, analysts say investors are also probably taking some of it to invest directly in the stock market.