Investors Buck Fund Norm for January

Times Staff Writer

The stock market usually can count on a lot of cash each January from mutual fund investors. But that may not be the case this year.

Early reports indicate that investors have shied away from stock funds so far in 2003, as an early-January rally quickly fizzled and major market indexes fell into the red.

For the slumping fund industry, that would be a sign that investors remain wary of being invested in stocks after a 2002 in which nine out of 10 equity funds posted negative returns and major stock indexes posted their third straight year of losses.


“People want their money back. They want the stock market to go up on a continuing basis, not just for a few days,” said Carl Wittnebert, research director at Investment Research in Santa Rosa, Calif., which tracks fund industry trends. Equity funds overall last year sustained their first year of net redemptions since 1988, if estimates of a net outflow of $20 billion or more are confirmed when the Investment Company Institute, the industry’s main trade group, releases its December data today. Fund flows measure how much money investors put into mutual funds minus how much they withdraw.

Analysts say last year’s outflow trend may be continuing in January -- which is normally one of the industry’s strongest months for attracting money, boosted by year-end bonuses and employees launching new 401(k) or other retirement savings plans.

According to unofficial estimates by industry analysts, stock funds are headed for an outflow this month of $700 million or more (TrimTabs says funds are on pace for a $1.5-billion outflow). If that trend holds, it would mean the first January of net redemptions since 1990, when $274 million was pulled.

Any outflow this month probably would be very small as a percentage of the $2.8 trillion in equity funds, but even a flat or mildly positive ledger would be a disappointment for an industry accustomed to an early-year asset bounce.

About 18% of the roughly $666-billion net inflow to stock funds during the last five years came during January, according to ICI data. In 2002, for example, there was a January inflow of $19.4 billion, making it the year’s second-strongest month. In January 2000, near the peak of the bull market for stocks, $44.5 billion poured in.

The slowdown in new money coming into stock funds removes a potential source of rally fuel for the market. A record cash infusion from individual fund investors in the late 1990s helped power the unprecedented bull run that ended in 2000.


Fund companies, which often closely guard their flow tallies, are reluctant to discuss this month’s trends in detail, noting that they can change dramatically in the last few days.

Industry leaders Fidelity Investments and Vanguard Group said they have seen inflows so far this month, although a Fidelity spokesman called the pace more modest than in January 2002. At T. Rowe Price Group Inc., inflows also have been small relative to January 2002, spokesman Brian Lewbart said.

“The fragileness of the economic recovery and geopolitical concerns still have a lot of people sitting on the sidelines,” Lewbart said, noting that $2.4 trillion is stashed in low-yielding U.S. money market funds. “Early last year was a very different environment, with the momentum of the fourth quarter 2001 rally carrying over.”

Bob Adler, whose AMG Data Services in Arcata, Calif., also tracks industry trends, said net redemptions or even flat sales in January could be marking a new phase in a trend that started in August 2000 -- the reallocation of money from stock funds to bond funds and other fixed-income investments. “Investors aren’t abandoning mutual funds or even the stock market, “but it’s pretty clear they are reallocating,” he said.

Based on his sampling, Adler said $680 million was redeemed from stock funds in the first three weeks of January, while $7.9 billion was shoveled into taxable bond funds -- the highest start-of-the-year tally he has seen for that category since he began tracking trends in 1992.

Indeed, on the heels of robust bond fund investment during 2002, Vanguard, Fidelity and T. Rowe Price all say they continue to see investors flocking to fixed income.


As they assess the prospects for a stock market rebound in 2003, fund companies are counting on investors such as Jack Rollow, a 69-year-old building consultant in Glendale, who has kept his retirement portfolio at around 70% stock funds and 30% cash for the last two years.

“I need more appreciation than bonds provide,” Rollow said. “I’m sticking with equities, hoping we’ll see some resurgence this year and next.”