Investors Returning to Stock Funds

Investors are cautiously returning to stock mutual funds, after yanking a record sum from the funds in March amid Wall Street’s winter plunge.

Spurred on by the stock market’s sharp rebound since early April, investors pumped an estimated $22.9 billion in net new cash into stock funds in April, according to Financial Research Corp., which tracks fund flows.

May also is expected to show a net cash inflow to the funds, researchers say. A net inflow means the total of fund share purchases more than offset the sum of shares redeemed.

Though Americans are investing in stock funds again, many are being much more conservative about what they buy, experts say.

“The speculative bubble is completely out of the market. People are getting back into stock funds, but they’re being much more cognitive, using funds that invest in companies with earnings” rather than higher-risk funds, said Bob Adler, president of AMG Data Services, which estimates fund flows.

The fund category that attracted the most money in April was the large-cap “value” fund sector, according to Financial Research. Value funds focus on companies selling at relatively low valuations based on measures such as price-to-earnings ratios.

Value stocks have shone as high-priced “growth” stocks--especially technology issues--have dived over the last year. Many growth stocks took their sharpest hits in the first quarter.

Investors “have gotten their first-quarter statements and they know where they were bitten,” said Don Cassidy, senior research analyst at Lipper Inc.

Despite the 37% rebound in the tech-dominated Nasdaq composite index since early April, technology stock funds have been luring less than 5% of overall fund cash inflows in recent weeks, Adler said. By contrast, in the first quarter of 2000, tech funds grabbed as much as 25% of total inflows.

Even so, the stock market’s comeback from two-year lows also has fueled buying of certain more aggressive funds as well.

“Inflows have definitely been more prevalent over the last six weeks,” said Peter Kris, managing director at Van Wagoner Capital Management, whose stock funds are loaded with tech names.

Overall, large-cap growth stock funds attracted $2.79 billion in net new cash in April, after seeing a net $6.8-billion flow out in March, Financial Research estimates.

Janus Capital, known for its high-octane growth funds, said its redemptions have slowed in the last two months. Redemptions by individual investors in April were more than offset by institutional inflows, the Denver firm said.

Still, year-to-date through April, Janus’ retail funds had net withdrawals of $4.4 billion, according to estimates by Financial Research.

All told, investors pulled a net $3.3 billion from stock funds in February, according to the Investment Company Institute, the industry’s main trade group. In March the outflow accelerated to $20.6 billion--a record in dollar terms.

But if estimates are in the ballpark for April and May inflows, the two-month total could more than erase the February and March outflow.

The ICI will release official April totals this week and May totals at the end of June.

April fund purchases may have been beefed up in part as investors made annual contributions to individual retirement accounts, analysts note.

Though big-stock value-oriented funds have been the biggest draws in recent months at many companies, investors appear to be diversifying their portfolios more than they might have in previous years--spreading purchases across the spectrum of stock fund sectors.

For example, since the first week of April, net inflows into small-cap funds have been growing, Adler said. Investor emphasis on fundamentals could be one reason: Though smaller stocks have outperformed blue chips over the last year, their relative valuations remain attractive compared with larger companies’, a report last week by Merrill Lynch said.

A spokesman for T. Rowe Price Associates said purchases have been strong across the board in the last two months, with small- and mid-cap funds leading the way. He noted that the firm’s Science & Technology Fund also has been selling well.

But the industry’s bestseller list has been led by relatively conservative names.

PIMCO Total Return, the nation’s largest bond fund, was the best-selling mutual fund of any type in April, Financial Research said, with $954 million in estimated net inflows. Its $4.1 billion in net purchases this year through April were nearly twice that of any stock fund.

Other bestsellers in 2001 include Growth Fund of America, a conservative large-cap growth stock fund from the American Funds family; Davis New York Venture, a blue-chip value stock fund; Vanguard Total Stock Market Index, which tracks the broad Wilshire 5,000 index; and Fidelity Dividend Growth, another blue-chip fund.

Cassidy noted that “balanced” or “hybrid” funds, which hold a combination of stocks and bonds, have surged in popularity, another reflection of shifting investor tastes. Balanced funds took in a net $1.65 billion in April versus a net $1.06 billion for tech funds, Financial Research estimates.

“When you think of what gets people excited you don’t usually think of the word ‘balanced,’ ” Cassidy said.

International stock funds took in $2.7 billion in April versus an outflow of $2.5 billion in March, Lipper estimates. Most of that cash went to diversified rather than single-country or regional funds, Cassidy noted, another sign of a temperate market.

Bolstered by improved returns, even gold funds have seen net inflows. They took in a net $75 million in April versus an outflow of $65 million in March, Lipper estimates.

Inflows into gold and natural resources funds have been positive every week since early April, AMG’s Adler noted. But at $5 billion in assets, they represent a tiny slice of the $7-trillion fund industry.

Thomas Winmill, president of Midas Management, which runs the Midas precious-metals fund, noted that gold stocks have rallied as the Federal Reserve’s interest rate cuts have heightened inflation fears, since gold is seen as a hedge against inflation.

But, he said, investors should be aware that the run-up has brought valuations on some gold stocks to high levels.

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Where Fund Money is Flowing

Sector Winners

Though large-cap value stock funds were the best-selling mutual fund category in April, according to Financial Research Corp., investments were diversified across a variety of categories. These were the best-selling groups:

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--Est. net cash flow, in millions-- Category April March Large-cap value $4,872 $1,597 Large-cap growth 2,786 --6,809 Large-cap blend 2,484 --3,544 Mid-cap growth 2,428 --843 Foreign stock 2,259 --1,607 Intermediate bond 1,864 3,540 Domestic hybrid (balanced) 1,650 515 Mid-cap value 1,628 1,298 Small-cap value 1,237 766 Technology 1,062 --372

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Individual Fund Winners

Relatively conservative stock and bond vehicles have dominated this year’s list of best-selling individual funds. Many of these funds were among the most popular in April as well.

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Est. net cash flow, in millions-- Fund YTD* April PIMCO Total Return $4,075 $954 Growth Fund of America 2,056 496 Davis New York Venture 2,042 607 Vanguard Total Stock Market 2,012 513 Fidelity Dividend Growth 1,923 380 Vanguard Total Bond Index 1,774 460 MFS Investors Growth 1,444 552 Alliance Growth & Income 1,375 307 Van Kampen Emerging Growth 1,222 834 Van Kampen Comstock 1,173 706

*--*

* through April

Source: Financial Research Corp.

Fast Turnaround?

Investors have returned to stock mutual funds in April and May after pulling a record net $20.6 billion from the funds in March, according to analysts who track fund company cash flows.

*

Stock fund net cash flows, in billions, by month

*

April: +$22.9 billion (estimate)

Sources: Investment Company Institute, Financial Research Corp.