Investors Are Tiptoeing Back Into Stock Funds

U.S. investors cautiously returned to stock mutual funds in October after September’s record outflow in the wake of the Sept. 11 terrorist strike, according to figures released Thursday--and the positive trend appears to have accelerated this month.

Stock funds took in a net $758million in October, according to the Investment Company Institute, the fund industry’s main trade group. That’s a puny sum by recent standards, but it’s reassuring on the heels of September’s $29.3-billion outflow, which was the third straight negative month and the fifth of the year. Net flows measure the amount of new cash taken in by mutual funds, minus redemptions.

This month, funds are on pace for a net inflow of about $8.9 billion, according to TrimTabs.com Investment Research, a Santa Rosa, Calif.-based data tracker.

The renewed interest by investors in stock funds coincides with the market’s recovery after the terrorist attacks. After sinking to a three-year low Sept.21, the Standard & Poor’s 500 index of blue-chip stocks has gained 18%, while the technology-heavy Nasdaq composite index has surged 36%.

Although investors continue to step back into stock funds, fund companies say, they are doing so with a degree of caution.

“Even though Nasdaq has been leading the recent rally, investors have been diversifying their portfolios,” said Steve Norwitz, spokesman for Baltimore-based T. Rowe Price Group Inc.

Norwitz said investors have been funneling money into stock funds of various styles, such as “growth” and “value,” and across the capitalization spectrum from small-cap to mid-cap to large-cap during the last two months. In other recent rallies, by contrast, new stock investments were concentrated in tech funds and other growth-oriented choices that more closely track the Nasdaq, he said.

According to TrimTabs, tech funds, which are still down an average of 40% year to date, are seeing their sixth straight month of net outflows in November.

“Tech is an area where people have not jumped back in,” said Carl Wittnebert, TrimTabs’ director of research. “Often there is sort of a grudge battle going on once investors have been burned.”

Investors also appear to have a “grudge” against foreign stock funds, which have slumped even worse than U.S. stock funds this year.

International funds, which had a net outflow of $2.5 billion in October, are on pace for an outflow of $3.1 billion this month, TrimTabs estimates. Funds that invest mainly in U.S. stocks, by contrast, are on track for a November inflow of $12 billion, which would be their highest tally since May.

Meanwhile, investors have continued to diversify across asset classes. Taxable bond funds, for example, which took in a net $11.5billion in October, according to the Investment Company Institute, have had positive cash flows all year.

At Charles Schwab Corp.’s mutual fund supermarket, bond fund flows have remained “steady and healthy,” said spokesman Morrison Shafroth. Bond funds offered by Schwab took in a net $657 million this month through Tuesday, he said, after taking in a net $890 million in all of October. Schwab’s stock fund inflows rose to $747 million in November from $318 million in October.

But not everyone believes that most investors are truly interested in diversification.

Scott Leonard, a financial planner based in El Segundo, said he thinks some investors--and their advisors--are snapping up small-cap funds, for instance, simply because their trailing performance looks good relative to large-cap funds.

In other words, they are chasing performance, which can be a painfully disappointing strategy in the long run. That’s what some tech investors learned when they got whipsawed by the market’s reversal of 2000, as that scorching sector suddenly turned cold.

Many investors, meanwhile, remain jittery about the whole market in the wake of Sept. 11.

Leonard said only one of his clients was spooked out of the stock market by the tragedy, and although that investor is “feeling better now, she is still not sure if she wants to get back in yet.”

Leonard said he believes the market might slide in December as investors sell stocks to realize paper losses for tax-planning purposes. Such a dip, he said, might present an attractive opportunity in late December for this client to get back into the market--ideally for the long term.