Stock Mutual Funds Again Are Gaining Favor
Investors appear to have regained their appetite for stock mutual funds this month, after a lull in February.
Major fund companies said their stock funds have seen strong cash inflows this month as economic signals have increasingly pointed to recovery.
Meanwhile, purchases of bond funds may be waning as interest rates rise, depressing the value of bond fund shares.
Industrywide data for February, reported Wednesday by the Investment Company Institute, showed stock funds’ net cash inflow totaled $4.7 billion in the month, down sharply from $20billion in January.
But demand has revived. Vanguard Group said purchases of its stock funds this month reached the highest level in almost three years. The firm expects net cash flow of $3.8 billion into its stock funds this month, the strongest since April 1999, spokesman John Demming said.
Net cash inflow measures new fund purchases minus redemptions and exchanges. Fund flows are watched as a key indicator of small investors’ interest in the markets.
Fidelity Investments, the largest U.S. mutual fund company, is seeing “very strong” purchases of equity funds this month, ahead of January’s pace that brought in $2.5 billion of new money, spokeswoman Anne Crowley said.
Investors are following the trend of the stock market: After rallying early in January, stocks slumped in February, then resurged early this month.
Demand for bond funds also is following market trends. High-quality bond funds, such as those that own government bonds and blue-chip corporate bonds, saw hefty cash inflows last year as market interest rates tumbled, driving up the value of older bonds paying higher yields.
The buying continued in January and February. Bond funds had net cash inflows of $10.5 billion in January and $10.7 billion in February, the Investment Company Institute said.
But yields on government bonds have soared this month amid surprisingly robust economic data. That has depressed the share prices of many bond funds, scaring some investors away.
Vanguard estimates that bond fund purchases slid to $1.2 billion this month from $2.5 billion in February, Demming said. Fidelity said its bond and money market funds have had modest cash outflows this month.
Industrywide, money market funds had a net cash outflow of $5.45 billion in February, compared with an inflow of $14 billion in January, the Investment Company Institute said.
Institutional investors, rather than small investors, were responsible for last month’s outflow: Money funds offered primarily to institutions had an outflow of $10.1 billion, while funds offered primarily to individuals had an inflow of $4.7 billion.
Total assets of money funds stood at $2.3 trillion at the end of February, compared with $962 billion in bond funds and $3.3 trillion in stock funds.
Some analysts believe that record-low yields on money funds may encourage more investors to shift cash from those funds to stocks as the economy rebounds.
The average seven-day annualized yield on taxable money funds stood at 1.36% as of Tuesday, according to money fund tracker IMoneyNet.com. Until the Federal Reserve begins to raise its benchmark short-term rate, money fund yields aren’t likely to increase significantly, analysts noted.
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Instinet May Post Loss Over Trading-Fee Cuts
Weak stock market volume has triggered a heated battle for business among once-vaunted electronic trading networks.
Instinet Group Inc. said Wednesday that it may post a first-quarter operating loss because the electronic stock-trading network has cut trading fees to lure more institutional customers.
New York-based Instinet said it will reduce annual operating costs by $120 million, double its previous estimate of $60 million. The company also expects restructuring charges of $55 million in the first half, more than double its original forecast of $25 million.
The company’s stock has fallen 35% this year as competition prompted a price war between Instinet and rival trading network Island ECN Inc.
Instinet and Island are private networks that allow big investors to trade directly with each other at lower cost than on established stock exchanges and the Nasdaq market.
Island handled about 11.2% of all Nasdaq-listed shares that traded in February, while Instinet traded about 10%, according to estimates from J.P. Morgan Chase.
“Even with the price cuts they’ve introduced, Instinet is still having to defend what was once the leadership position,” said Richard Strauss, an analyst at Goldman, Sachs & Co.
Instinet’s most recent price change amounted to a 60% drop in fees for brokers, who account for 70% of the firm’s electronic trading business, according to J.P. Morgan Chase estimates.
Instinet shares (ticker symbol: INET) plunged as low as $5.66 on Wednesday on Nasdaq before recovering to close up 8 cents at $6.49. The company went public in May, and the stock reached a peak of $21.75 in June.
Bloomberg News
