Posted on: Thursday, January 1, 2004
Despite scandals, stock mutual funds are thriving
By Josh Friedman
Los Angeles Times
Investors continue to show faith in stock mutual funds despite the industry's trading scandals, pouring cash into equity funds at a pace not seen since 2000.
Equity funds hauled in a net $14.9 billion in November — the ninth consecutive month of positive cash flows — and the inflow might be even higher for December, according to data and estimates issued this week. Fund flows measure investors' new purchases of fund shares, minus redemptions.
Boosted by the bull market that has reversed three years of losses for stocks and lifted the Dow Jones industrial average back above 10,000 amid signs of a healthier U.S. economy, equity funds took in $138.1 billion through the first 11 months, according to the Investment Company Institute, the fund industry's main trade group.
That means 2003 could see the best inflow for stock funds since 2000, when they lured a record $309.4 billion. Last year, investors redeemed a net $27.7 billion, ICI data show.
Stock fund inflows in December may have approached or exceeded $20 billion, said Bob Adler, president of AMG Data Services in Arcata, Calif. That would make last month the best for equity fund flows since 1999, when $24.9 billion poured in.
Investors are focused on the rising stock market and the improving economy, Adler said. "The fund trading probes are taking a back seat, except in cases where the misdeeds are considered egregious."
Two fund firms whose reputations have taken hits in the trading scandals, Putnam Investments and Janus Capital Group Inc., have suffered redemptions, according to estimates by the consulting firm Financial Research Corp.
Two firms known for their conservative style have topped Financial Research's sales charts in 2003: American Funds, run by Los Angeles-based Capital Research & Management Co., and Vanguard. Those firms had eight of the 10 best selling funds in November, including the year's most popular fund, American Funds' Growth Fund of America, which took in $1.8 billion in November and $12 billion in the first 11 months.
Fidelity Investments, the biggest fund company, said the flow of cash into its stock funds in December ran at about the same pace as November, while Vanguard Group said December's inflow had been modestly below the previous month's.
Industrywide, although the November inflow was down from October — the year's top month, when a net $25.3 billion piled in — the recent trends have been better than normal for the holiday season. "At this time of year, people are usually thinking about other stuff," said Don Cassidy, senior analyst at fund tracker Lipper Inc. in Denver.
Surprising some analysts, stock fund inflows have picked up since early September, when the scandals over late trading and "market timing" erupted in the $7.1 trillion fund industry.
Meanwhile, investors have shifted away from bond funds since June as interest rates have risen from their historic lows. Bond mutual funds had net redemptions of $2.5 billion last month, their fifth straight month of outflows, the ICI said.
After attracting a record $140 billion last year, bond funds took in a net $34.4 billion in the first 11 months of 2003. Market interest rates have been rising since hitting generational lows in June, depressing total returns in the sector as bond prices decline. The losses could worsen if the Federal Reserve hikes its target interest rate next year, as some economists expect.
Investors also fled low-yielding money market funds in November, the ICI said. The net redemption of $7.7 billion brought last year's outflow to $236.2 billion through November.
