Mutual fund investing sees slowdown
By Josh Friedman
Los Angeles Times
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 mutual funds so far in 2003, as an early-January rally quickly fizzled and major stock 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 consecutive 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 TrimTabs.com Investment Research in Santa Rosa, Calif., which tracks fund industry trends.
Weary from a three-year bear market, investors last year pulled more money out of stock mutual funds than they put into them, an act of despair not seen in 14 years.
Stock mutual funds posted net outflows of $27.10 billion, or 0.9 percent of their average assets, according to the Investment Company Institute, a trade association for the mutual fund industry. The last year funds had annual outflows was 1988, when shareholders cashed in 8 percent of funds' assets.
For the month of December, equity funds suffered a net outflow of $7.75 billion amid investors' growing worries about the prospects of war with Iraq, the ICI reported Thursday.
Analysts say last year's outflow trend may have continued in January — usually one of the industry's strongest months for attracting money, boosted by year-end bonuses and employees launching 401(k) or other retirement savings plans.
According to unofficial estimates by industry analysts, January stock funds headed for an outflow of $700 million or more (TrimTabs says funds were on pace for a $1.5 billion outflow). If that trend held up, it would mean the first January of net redemptions since 1990, when $274 million was pulled out.
Any outflow last month probably would be small as a percentage of the $2.8 trillion in equity funds, but even a flat or mildly positive ledger would be disappointing for an industry used to an early-year asset bounce. About 18 percent of the roughly $666 billion net inflow to stock funds in the past 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 cash infusion from individual fund investors in the late 1990s, for example, helped power the unprecedented bull run that ended in spring 2000.
Fund companies — which often closely guard their flow tallies — are reluctant to discuss January's trends in detail, noting that they can change dramatically in the last few days of the month.
Industry leaders Fidelity Investments and Vanguard Group said they have seen inflows in January, 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," Adler said, "but it's pretty clear they are reallocating."
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.
The Associated Press contributed to this report.
