Net Outflows Possible for Stock Funds

U.S. stock mutual funds saw net cash inflows jump in January as Wall Street rebounded, but the market’s latest swoon might leave the funds with net outflows this month--for the first time since August 1998.

Instead of taking risks in stock funds, many volatility-queasy investors continue to pour cash into money market funds, data show. Money funds’ assets recently topped a record $2 trillion.

Stock funds overall could show a net cash outflow of $12.5 billion for February, according to estimates by TrimTabs.com Investment Research Inc.

That would top the previous record outflow of $11.7 billion in August 1998, when Russia’s debt default panicked investors worldwide.

Even a $12.5-billion outflow would be small, considering that stock funds hold $4 trillion in assets. But the industry has been used to virtually constant monthly inflows since 1990, so any net loss of capital is a major switch.

Now, with the technology-dominated Nasdaq composite index plummeting anew this month, “there’s been a flight to safety,” said Burton Greenwald, a Philadelphia-based mutual fund consultant.

That wasn’t how the year began: Stock funds had a net cash inflow of $24.6 billion in January, up from $11.6 billion in December, the Investment Company Institute said Tuesday.

Though the January inflow was far below the $40 billion that stock funds took in during January 2000--amid a soaring Nasdaq market--it still suggested that many investors were taking an optimistic view of 2001, after heavy losses in growth-stock funds last year.

But in February, as tech shares and other former highflying stocks stumbled again, fund investors have turned more cautious.

As of last week, the average U.S. stock fund was down 6.2% year to date, according to fund tracker Morningstar Inc.

Technology stock funds were down 16% year to date as of last week, after diving 33% last year.

Fidelity Investments said its stock funds overall have had small net outflows in February. Invesco Funds said its stock funds have taken in a net $202 million for the month, down from $1.3 billion in January.

However, Vanguard Group said its stock funds’ net inflows for February total $1.4 billion.

Many fund companies report that investors continue to push cash into bond funds, which on average outperformed stock funds last year as market interest rates fell, boosting the value of older bonds.

Bond funds took in $8.6 billion in net new cash in January, the Investment Company Institute said.

Also, cash continues to pour into money market funds.

Money funds took in $102.8 billion in January, beating the previous record of $60.7 billion set in January 1999, ICI said.

As of Feb. 21, the latest data available, money fund assets reached $2.03 trillion, up from $1.85 trillion at year’s end, ICI said.

The bulk of money fund inflows in January came from institutional investors, experts say. Those investors typically shift heavily to money funds to take advantage of higher interest rates when rates on other securities are falling sharply because of Federal Reserve-engineered rate cuts.

Still, assets of money funds favored by individual investors also have risen in recent weeks, as more investors step to the sidelines amid a troubled stock market.

The average annualized seven-day compound yield on money funds is about 5.3% currently.