Stock Fund Inflows Sink in Limp Market

U.S. stock mutual fund purchases are slumping for the second straight month as investors pull money out of rocky equity markets.

Last week, investors yanked $7.5 billion out of funds that invest in U.S. and international stocks, cutting inflows for those funds to about $6.5 billion in the first four weeks of September, according to data released Wednesday by Trimtabs.com Investment Research of Santa Rosa, Calif.

That followed a drop in net new inflows during August to $9.2 billion from $12.4 billion in July, the Washington-based Investment Company Institute said. The decline prompted some analysts to forecast meager gains ahead for U.S. stocks.

“We’re bearish because there’s going to be more money going out of the market than going into it,” said Carl Wittnebert, director of research at Trimtabs.

The Standard & Poor’s 500 index is down 3.9% this month, putting it on track for its first three-month losing streak since Iraq invaded Kuwait in 1990. It’s up 3.2% so far this year, far lower than the gains of at least 20% in each of the previous four years.

Net cash inflows into all four major categories of mutual funds have declined this year from last. Even money market funds have taken in fewer dollars.

Analysts have speculated that more investors are putting money directly into stocks and bonds rather than using funds.

Some skittish investors have been moving money into short-term bond funds, a shift that made August’s best-selling U.S. fund Vanguard Short-Term Corporate Bond. The Pimco Low Duration fund was No. 3, after Vanguard Index 500, according to Boston-based Financial Research Corp.

“People are using short-term bond funds as a proxy for money market funds,” Wittnebert said. “I wouldn’t think that’s being committed to the bond market.”

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Where’d the Money Go?

The mutual fund industry is taking in far fewer new dollars this year than last year. A look at net new cash flow (new fund purchases minus redemptions) for major fund sectors in 1998 and 1999, both measured through Aug. 31 :

Net new cash flow (in billions)

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1998 1999 Money market funds $156.6 $91.1 Stock funds $132.4 $112.0 Taxable bond funds $41.4 $18.4 Muni bond funds $10.2 $1.8

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Source: Investment Company Institute