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MARKET BEAT / TOM PETRUNO

Funds Cash In Even as Consumer Confidence Dips

July 30, 1993|TOM PETRUNO

If you're feeling lousy about the economy and your finances, here's what to do: Buy more stock and bond mutual funds.

That must be a tonic, because Americans are taking it in near-record doses. Despite a continuing dive in consumer confidence indexes, individual investors purchased $40.7 billion in stock and bond fund shares in June, according to a report issued Thursday by the funds' trade group, the Investment Company Institute.

To put that number in perspective, it is only slightly below the torrid pace of $42.2 billion in March. It also is up significantly from $36.9 billion in May, and dwarfs the $28.3 billion of June, 1992.

More important, many large investment companies report that individuals' appetite for funds in July is even stronger than in June--even though the economy has slowed, and even though July usually sees a seasonal drop in fund inflows.

Fidelity Investments, for example, contends that July will be its best month ever, though it does not release dollar figures. Vanguard Group, another fund giant, says its net cash inflow is $1.4 billion so far in July which, while not a record, is up from $1.1 billion in June. Putnam Investments has taken in $1.3 billion in net new cash this month, the fourth-best month in its history, the firm says.

The funds' measurement of "net new cash flow" is a better indicator of investor demand than gross fund purchase figures, because the former gauges the funds' net gain in money after subtracting redemptions (when investors sell out) and exchanges among funds in the same company.

In June, the funds' trade group says net new cash flow into stock funds was $9.2 billion, up from $9.0 billion in May. Net new cash into bond funds was $10.5 billion, up from $10.1 billion in May.

What all of these huge numbers suggest, of course, is that investors are wildly bullish on stocks and bonds. Except that they aren't.

When Fidelity conducted its regular monthly survey of investors nationwide in July, it found sentiment gloomy overall--the gloomiest, in fact, since last October, when the stock market reached its 1992 low on election jitters. Likewise, the Conference Board's consumer-confidence indicator fell in July for a third straight month.

Why are unhappy people putting their money into financial markets? One answer is that many people perceive that they are investing cautiously, and so aren't vulnerable if their worst fears about the economy (or their own finances) come true.

Purchases of U.S. growth-stock funds, for example, have been sliding all year, evidently because many investors feel that U.S. stocks are overpriced and thus are too risky. But rather than hold back those dollars, investors have funneled them into other types of stock funds--especially those funds classified as "conservative."

At Vanguard, the company's Wellesley Income fund has suddenly become wildly popular. The $4.8 billion-asset fund--which owns a mix of high-quality bonds and blue chip stocks--has taken in $259 million in net new cash this month.

Investors also are pouring money into international stock funds, heeding the advice of many pros, who contend that foreign markets are decidedly cheaper than the U.S. market.

On the bond-fund side, investment firms report robust purchases of funds touted as less risky, should interest rates rise: short-term bond funds, for example, and "flexible" funds, which own a mix of corporate, government and foreign bonds.

Stock and bond market bears just cluck at these fund trends. If a disastrous selloff hits the markets, the bears point out, no investment can truly be safe. Anybody who says otherwise is plain lying.

But the bears miss the point: Americans have been scared into saving and investing more. A lousy economy just reinforces that idea because job security is nil. And until and if short-term interest rates rise, there are few good alternatives for most peoples' savings than stocks and bonds.

It is true that the funds are winning by default, but many investors rightly figure that the greater risk today is taking no risk with one's money.

Funds' Changing Fortunes

Mutual fund investors have lost their appetite for classic U.S. "growth stock" funds. Instead, many fund investors are buying international.

Source: Investment Company Institute

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