New Record Set for Stock Fund Inflow in January

Americans poured a record-shattering $39.9 billion into stock mutual funds in January, and the industry is on track for another big month in February.

But this rising tide of cash isn’t lifting all boats. Instead, it’s focused on a relative few fund sectors--a phenomenon that in part explains the split personality of the U.S. stock market.

Indeed, fund investors, like many people who are buying individual stocks, are making huge bets on the high-risk, high-return technology sector and on aggressive-growth funds in general.

In turn, that is giving those fund managers cash with which to chase many already-hot stocks in those sectors.

Foreign stock funds, which likewise tend to be higher-risk investments, also are seeing a massive inflow of cash.

At the same time, many fund investors are pulling cash out of diversified stock portfolios and safer “growth and income” funds.

“People are buying what’s working, simply because it’s working, which is the pure definition of momentum investing,” notes Thomas McManus, equity portfolio strategist with Banc of America Securities in New York.

Adds Ed Rosenbaum, director of research at fund tracker Lipper Inc.: “On average, fund investors are becoming much more daring with each additional net dollar they commit to equity funds so far this year. More technology and more world equity investing show an increasing appetite for risk.”

The almost $40 billion in net new investment in stock funds last month far exceeded the old record of $28.5 billion set in January 1997, the Investment Company Institute, the funds’ chief trade group, said Monday.

January is traditionally a strong month for mutual fund investment, as many Americans invest year-end bonuses and adjust 401(k) retirement plans.

Some fund companies, including Janus, Invesco and Charles Schwab, are also reporting that February is on track to be a record-breaking month. Year to date, Schwab has already seen a net inflow of nearly $5 billion into its mutual fund “supermarket.” That’s about half as much as Schwab pulled in all of last year.

But fund buyers in general are directing most of their money to a few specific fund categories.

Sector funds, dominated by tech funds, took in $11.5 billion in net new cash in January, ICI said. That compares with $28.9 billion that flowed into those funds in all of 1999.

Lipper estimates that tech funds alone got nearly $9 billion of the January sector-fund inflow.

Aggressive-growth funds, the type of diversified fund most likely to buy the smaller technology, telecom and other “new economy” stocks that are soaring this year, took in $16.7 billion in new cash in January. By contrast, those funds took in $34.4 billion in all of 1999.

For February, aggressive-growth funds are on track for a third consecutive $10-billion-plus month of net inflow, analysts say.

Where’s that cash coming from? Some investors are selling out of more conservative stock funds that own “old economy” stocks such as financial, manufacturing and other “value” issues.

Such growth-and-income funds are on pace for a fourth straight month of net outflow this month. A net $7.6 billion flowed out of those funds in January.

Equity-income stock funds, which seek dividend income in addition to capital appreciation, suffered net redemptions of $4.9 billion in January. And funds that invest in a mix of stocks and bonds saw about $3.6 billion flow out, ICI figures show.

Conservative investors, meanwhile, may be unwilling to embrace either the soaring new-economy funds or the tumbling value-oriented funds, and may instead just be building up cash: Money-market fund assets jumped by $41.7 billion in January, even more than stock funds took in.

Maybe the biggest surprise is the heavy inflow of money to foreign stock funds. They took in more cash in January than in all of 1999.

Schwab says foreign funds have been its most popular stock funds for the last three months.

“The public tends to associate international [investing] with high risks,” says Carl Wittnebert, director of research for the Santa Rosa-based research firm Trimtabs.com. “And right now, people seem to be gravitating toward high-risk, high-return investments.”

Another explanation for the shift overseas could be that many 401(k) plan participants simply rebalanced their portfolios at the start of the year. Based on the strong performance of international stocks last year, many investors may have increased their foreign allocations.

Indeed, according to the benefits consulting firm Hewitt Associates, which tracks 401(k) trends, more than 23 cents of every dollar that was moved inside a 401(k) in January was directed into an international stock fund.

In taxable accounts, “the types of foreign funds doing very well are those that are labeled ‘global growth,’ ” says Banc of America’s McManus. He says investors realize that although “the U.S. appears to have a majority of the [world’s] exciting tech companies, there are some that exist overseas, too.”

But though foreign funds posted out-sized returns in 1999, many are off to a mediocre start in 2000, in part because of the strong dollar.

Along with conservative stock funds, money continues to bleed away from bond funds.

Taxable bond funds experienced net outflows of $8.6 billion in January, while tax-free municipal bond funds saw outflows of $4 billion. And high-yield “junk” bond funds bled $1.9 billion through net redemptions.

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Stock Fund Inflows Soar . . .

Net new cash flow into stock mutual funds--that is, gross purchases less redemptions--hit a record in January, at nearly $40 billion. That topped the previous monthly record of

$28.5 billion, set in January 1997. Net new cash flow each month, in billions:

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. . . but Only a Few Sectors Win Big . . .

Most of the money that poured into stock funds in January was aimed at aggressive-growth funds, sector funds (primarily technology) and foreign stock funds. In fact, foreign funds took in more net new cash in January than in all of 1999. Most other stock fund categories saw meager inflows in January--or saw cash flow out. Inflows, in billions:

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. . . and Many Investors Still Favor Cash

Investors shoveled $41.7 billion into money-market funds in January, even more than went into stock funds. Net assets of taxable and tax-exempt money market funds, in trillions:

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Source: Investment Company Institute