Mutual Fund Investors Going With the Flow
More than 3 out of every 4 new dollars invested in stock mutual funds in 1999 went to just a handful of fund companies and two types of funds--large-growth-stock and technology sector funds.
Analysts say the new data, compiled by Financial Research Corp., are the clearest sign yet that fund investors, long viewed as conservative “buy-and-hold” types, increasingly are succumbing to the temptations of aggressive “momentum” investing.
“It has been an unusual period where investing in securities that already have risen continues to be successful for such a long period of time,” noted Avi Nachmany, analyst at fund-research firm Strategic Insight in New York. “Clearly, momentum investing is creeping into the business, following momentum investing in stocks.”
There were additional signs of restlessness among fund investors last year, even as the net amount of new cash invested in stock funds rose, after dipping in 1998 from 1997’s record high. Figures released Monday by the Investment Company Institute, the industry’s chief trade group, show:
* Stock fund redemptions rose 39% in 1999, to $743 billion, while gross new purchases increased 31%, to $918 billion. That marks the second straight year that the pace of redemptions was faster than the pace of new purchases.
* The total amount of net new cash invested in stock, bond and money market funds fell, as bond funds saw more money leave than come in. Total industrywide fund inflows slumped 24% to $363.5 billion.
* For the second straight year, Americans poured more net new cash into money market funds than stock funds--$193.9 billion versus $187.5 billion.
About 67 cents of every new $1 that went into stock funds in 1999 went into large-growth funds, which gained 39% on average last year and 35% in 1998. Twenty cents went into tech funds, which soared 135% and 52% over the previous two years, according to figures compiled by Financial Research, which is based in Boston.
What makes this so remarkable is that large-growth funds and tech funds represent just 17% of total stock fund assets. Thus about 25 other categories of stock funds competed for the remaining 13 cents.
But there was little for most to fight over after index funds and “multi-cap” growth funds (which can invest in growth stocks of all sizes) got their share of that, according to Strategic Insight.
“It’s not just the fact that technology has done so well,” said Charlie Bevis, managing editor of the FRC Monitor, an industry newsletter. “There were a number of other categories [of funds] in net redemptions.”
Indeed, more than half of all funds and fund firms were either flat or bleeding assets last year through the end of November, FRC numbers show. That’s up from 1998, when slightly more than a third of all fund complexes were in net redemptions.
As was the case for much of the year, just a few fund companies--led by giants Vanguard Group, Janus and Fidelity Investments--attracted most of the money. Indeed, more than 75% of all the money that went into stock funds last year through the end of November flowed to Vanguard, Janus, Fidelity or Alliance Fund Distributors.
Of course, the concentration of fund flows reflects the overall narrowing trend in the stock market, analysts say.
Still, “I think we have hit an extreme,” said Bill Dougherty, a fund analyst with consulting firm Kanon Bloch Carre in Boston, alluding not just to the flows’ concentration but also to Americans’ willingness to invest in aggressive, high-risk funds. Investors “have no idea what they’re doing risk-wise,” he said.
Yet investors are gravitating toward--not running away from--high-growth, high-risk sectors thus far in 2000.
Several fund companies, including Janus, Fidelity, Vanguard and Invesco, reported extremely strong flows in January, a month that saw much market volatility. Much of the money is going into technology, telecom, biotechnology and/or growth funds, company officials say.
In December, “aggressive-growth” funds attracted $11.5 billion in net new money, whereas more conservative “growth-and-income” funds saw net redemptions of nearly $6 billion.
“That’s just unheard of,” said Carl Wittnebert, director of research for the Santa Rosa, Calif.-based research firm Trimtabs.com. “The public has developed this wild appetite for risk.”
Meanwhile, investors have all but lost their appetite for bond funds, coming off a year in which rising interest rates hurt the principal value of many bond portfolios. Taxable bond funds saw outflows of $6.2 billion in December. For the year, just $6.8 billion of net new money flowed into taxable bond funds, versus $59.4 billion in 1998.
Municipal bond funds were hit even harder. They experienced outflows of $7.2 billion in December and wound up with net redemptions of $12.1 billion in 1999.
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Tracking Mutual Fund Cash Inflows
Net cash inflows to stock mutual funds--that is, gross purchases less redemptions--rose last year after slumping in 1998. But most of the money that poured into funds in 1999 went into just two major categories.
Sources: Investment Company Institute, Financial Research Corp.
* Times staff writer Paul J. Lim can be reached at paul.lim@latimes.com.
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* DOW JUMPS 201
U.S. stocks wrap up first losing month since September with big rally. C4
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* MUNI SLUMP
Fund withdrawals help depress muni bonds. C7
