U.S. Stock Funds’ Appeal Dwindles
Some key U.S. stock market indexes have rallied to record highs this week, but many investors aren’t coming along for the ride: Inflows into domestic stock mutual funds have slumped 70% this year, new data show.
Investors put a net $24.8 billion into domestic funds in the first half of the year, compared with the nearly $82 billion they invested in the portfolios in the first half of 2004, according to a report Thursday from the Investment Company Institute.
The steep decline in part reflects that the stock market had a rocky first half, as well-known indexes such as the Dow Jones industrial average slipped.
Still, even as Wall Street has rallied sharply since late April, inflows into U.S. stock funds have remained depressed. In June the funds took in a net $1.7 billion, down from $5.2 billion in May, said the institute, the industry’s chief trade group.
Net cash inflows measure new purchases minus redemptions, and are a gauge of the health of the $8.2-trillion fund industry as well as of investor sentiment.
“There’s just a remarkable lack of interest in domestic funds,” said Carl Wittnebert, director of research at Santa Rosa, Calif.-based TrimTabs Investment Research, a firm that tracks industry trends.
The dwindled cash flows reflect a number of factors, analysts said: Some investors are favoring foreign stock funds over domestic funds, a trend that heated up last year; exchange-traded funds, alternatives to traditional stock funds, are siphoning away some cash; and Americans are putting more money into bank savings certificates as short-term interest rates rise.
What’s more, many investors remain wary of stocks in general after the deep bear market of 2000-02, while others are more stoked these days about the surge in real estate prices, financial advisors say.
“We’re so used to action in TV, movies and our own lives,” said financial planner Victoria Collins of the Keller Group in Irvine. “We want a faster-paced recovery in the stock market, and Wall Street just isn’t providing it right now. Frankly, people are bored with the stock market.”
But perhaps not with foreign stock markets: U.S. investors’ net purchases of foreign stock funds jumped to $48.7 billion in the first half, up 35% from the first half of 2004.
Foreign-fund returns were boosted last year by the weaker dollar. This year the dollar has strengthened, hurting many foreign stock portfolios. Yet that hasn’t stemmed the rush of U.S. investors into those funds.
“There’s this perception that America is losing its fastball” compared with foreign rivals, said Phil Dow, equity strategist at brokerage RBC Dain Rauscher in Minneapolis.
Through Thursday, returns in many major foreign markets year to date were beating U.S. market benchmarks, even adjusting for the negative effect of the stronger dollar.
The French market, for example, was up 4.5% for the year in dollar terms, compared with a 2.6% rise in the U.S. Standard & Poor’s 500 index. The Canadian market was up 11% and the Australian market was up 5.2%.
Apart from the competition from foreign funds, domestic stock funds also have been hurt as exchange-traded funds have solidified their position as an emerging rival to traditional index-style mutual funds.
Exchange-traded funds are baskets of stocks that track market indexes and trade throughout the day like individual securities. They provide a fast way to get into or out of the market and have low management expenses.
Net new issuance of exchange-traded fund shares totaled $19.1 billion in the first half, down from $22.7 billion in the first half of 2004 but up significantly from $5.3 billion in the same period of 2003, the Investment Company Institute said.
For some people, any investment in stocks may seem like too risky a move these days when short-term cash accounts are paying the highest interest rates in four years.
Americans have pumped large sums into savings certificates over the last year: The total in certificates of $100,000 or less at banks and thrifts nationwide was $911 billion at mid-month, up $117 billion from a year earlier, according to the Federal Reserve Bank of St. Louis.
But as many people shy away from U.S. stock funds, some analysts say the trend could be a positive sign for Wall Street’s latest rally.
That’s because mutual fund cash flows are viewed as a “contrary” indicator: A disbelieving public often is a necessary ingredient for a sustained bull market, because it means there are many people on the sidelines who could be pulled in later.
By contrast, when money is pouring into stock funds it’s often a sign that the market is topping, analysts say.
“The last thing you’d want to see is a return of those unheard-of inflows that came in 2000,” TrimTabs’ Wittnebert said. In the first four months of that year domestic stock funds were flooded with a net $132 billion in new cash -- just as the historic 1990s bull market was peaking.
