Investors Pour Cash Into Stock Funds, but Flee Bond Funds

U.S. stock mutual funds are on pace to post their biggest cash-inflow month on record as investors pour money into technology and international funds.

Investors have put about $25 billion into stock funds this month, already topping October’s estimated $23.3 billion, according to Trimtabs.com Investment Research.

If they maintain the current pace, November net cash inflows will top $34 billion, Trimtabs said Wednesday. The record is $28.5 billion in January 1997, according to the Investment Company Institute.

“Just looking at the fund flows, it scares me that people seem to be throwing caution to the wind,” said Carl Wittnebert, research director at Trimtabs.

Investors are chasing a rally in computer-related shares that has driven the Nasdaq composite index up 56% this year. A recovery in Japanese and other Asian stocks has also lured investors.

That has made some international and technology stock funds the biggest cash-flow winners this month, according to Trimtabs, which is based in Santa Rosa, Calif.

Net purchases of tech funds haved soared to $918 million for the month, Trimtabs said.

At Charles Schwab Corp., the biggest merchant of funds through its OneSource marketplace, this has been the first month above $2 billion in net purchases of stock funds overall since November 1998, according to spokesman Morrison Shafroth.

Stock fund purchases through Schwab totaled $2.4 billion through Tuesday. About $635 million went to aggressive growth funds (many of which favor tech stocks), $535 million to growth and income funds, and $472 million to international funds.

“This year is a broader market than last year,” said Fred Taylor, chief investment officer at U.S. Trust Corp., which manages $77 billion, including $10 billion in mutual funds. “World markets have gotten themselves in much better shape much more quickly than anyone would have thought a year ago.”

At the same time, however, many investors are pulling money from bond funds, whose share values have declined as market interest rates have risen--pushed higher in part by the Federal Reserve’s three interest-rate hikes this year, the latest on Nov. 16.

Net withdrawals from bond funds totaled $852 million in the week ending Monday, Trimtabs said.

The average U.S. bond mutual fund has handed investors a negative total return of 1.6% so far this year, as interest earnings have been offset by loss of share value.

Bonds’ woes have prompted some financial planners to recommend that investors shun the securities for now.

“A better approach might be pure cash [money market funds] as an alternative to bonds,” said Christiane Delessert, a certified financial planner at Delessert Financial Services Inc. in Newton, Mass.

“Bonds have really been a terrible place to be in for quite a while,” Delessert said. “Typically, you go into bonds for the stability, but the whole approach has to be rethought” as long as interest rates are rising in a strong economy, she said.