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Investors Are Backing Away From Stock Mutual Funds

Wall Street: February data reveal first net monthly cash outflow since 1998. Yet the biggest target by investors was foreign funds rather than domestic ones.

March 30, 2001|TOM PETRUNO and JOSH FRIEDMAN | TIMES STAFF WRITERS

Stock mutual funds in February suffered their first net monthly outflow of cash since August 1998, a strong indication that many Americans finally were spooked by the yearlong bear market on Wall Street.

March reports from major fund companies suggest that, on balance, cash continued to exit stock funds this month--which would mark the first back-to-back monthly outflow since 1990.

Yet the reaction of the vast majority of fund investors to the market's ongoing plunge has been simply to pull back from either buying or selling, data show.

The February net outflow from stock funds was $3.1 billion, the funds' chief trade group, Investment Company Institute, reported Thursday.

That is the first outflow since a net $12 billion exited funds in August 1998, when Russia's debt default sparked fears of a global financial crash.

Estimates from private data services had projected varying outflows for February. The ICI's data are considered official industry results.

The overall stock fund inflow or outflow figure reflects gross purchases of funds adjusted for redemptions by investors pulling money out and exchanges among funds in the same family.

Though the February outflow was tiny relative to total stock fund assets of $3.7 trillion, fund cash flows can be important in influencing market trends. If portfolio managers aren't taking in new money, and instead are seeing cash leave, they are more likely to be selling stocks from their portfolios than looking for new stocks to add.

Thus, in a falling market, mutual fund outflows can help put more downward pressure on share prices. The funds own about one-fifth of the U.S. stock market.

Throughout 2000, even as technology stocks crashed last spring and the broader market sank later in the year, stock mutual funds continued to see net cash inflows. In part, that reflects automatic investing via 401(k) retirement plans.

What's more, investors pumped a net $25.1 billion into stock funds in January, up from $11.6 billion in December. The January cash boost helped fuel a market rally that month, before the bear market resumed in February.

Now, with most key stock indexes down between 10% and 30% this year, adding to last year's losses, Americans increasingly appear unwilling to make new bets on stocks through funds.

Yet the February fund industry report showed that the biggest target of selling by investors was foreign funds rather than domestic ones. Foreign stock funds had a net outflow of $4.4 billion for the month. That was far larger than the $1.5-billion outflow from aggressive-growth U.S. funds--those most likely to own tech shares.

Meanwhile, funds categorized as growth, growth and income or equity income--all of which tend to own U.S. blue-chip stocks--still saw net inflows, on balance, in February, ICI data show.

Though investors' gross purchases of stock funds fell to $80.8 billion in February from $115.7 billion in January, redemptions also declined, dropping to $77.5 billion from $91.8 billion in January.

Likewise, though investors favored bond funds and money market funds in February over stock funds, there was less investing activity, in general, than in January.

Taxable bond funds had a net inflow of nearly $7 billion in February, down from $7.5 billion in January. Money market funds--viewed as an ultra-safe place to store cash--took in $55 billion in February, down from $103 billion in January.

Industry-wide, Pimco Total Return--a bond fund--was the best-selling stock or bond fund in February, according to Financial Research Corp., a Boston-based fund tracker.

For March, most major fund companies said Thursday that they expect to report more outflows from their stock funds. One data service, TrimTabs.com, estimated that March's outflow could top $20 billion.

Fidelity Investments has had net outflows from stock funds so far this month, a spokeswoman said. That continues the trend from February, when its stock funds had an outflow of $1.1 billion.

But Fidelity said its fund purchases overall have remained positive as the firm's bond funds are ringing up strong activity for the fourth straight month and money funds continue to attract cash.

T. Rowe Price has had moderate cash outflows in equity funds for the month, but strong flows to money funds, said spokesman Steve Norwitz. Most of the outflows are coming from index funds as opposed to actively managed funds, he said.

One measure of the fund industry's shifting fortunes: Franklin Resources has overtaken Janus Capital to become the fifth-biggest U.S. mutual fund group, Financial Research said. About one-third of Franklin's assets are in bond funds.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Pulling Out

Stock mutual funds overall suffered a net outflow of cash in February, the first since 1998, industry data show.

Monthly net cash flows to stock funds, in billions

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Source: Investment Company Institute

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