Stock Funds Keep Bleeding
By Ian McDonald
Senior Writer
7/23/01 3:17 PM ET
Thanks to Wall Street's dyspeptic ways, fund investors have lost much of their appetite for sputtering stock funds.
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That's the upshot from the latest fund cash flow estimates. Redemptions from stock funds have outpaced investments into them for four consecutive weeks through last Thursday, according to liquidity tracker TrimTabs.com. While funds' cash flows don't always presage stock market moves, the bleak figures are just the latest in a steady stream of data underscoring fund investors' flagging confidence in equities. A record $309 billion gushed into stock funds last year after 1999's heady gains, but this year inflows are well off that pace as investors' endure the market's continuing blue period.
In sum, U.S. stock funds are in net outflows over the past four weeks to the tune of $9 billion. While the outflow isn't substantial given the more than $3 trillion in stock funds' coffers, it does indicate that fund investors aren't too jazzed about the stock market. The numbers become more stark when we compare fund cash flows this year and in 2000.
Through July 19, stock funds had taken in $33.3 billion. But at a comparable point last year their inflows topped $230 billion, by TrimTabs.com's tally. At the same time, flows to bond and balanced funds are in the black, reversing net outflows last year. Cash flows to money market funds are above $43 billion, up from $30.5 billion at this time last year.
A Disaffection
Fund investors lose their appetite for stock funds (flows, $billions)
YTD 2001 YTD 2000
Stock Funds $33.3 $230.5
Bond and Balanced Funds 39.6 -59.3
Money Market Funds 43.5 30.5
Source: TrimTabs.com. Flow estimates through July 19.
Cash flows to mutual funds are closely watched as a barometer of investor sentiment, but some pundits use them to argue for good or bad times ahead. An optimist, for instance, might argue that rising cash flows to funds are positive for the market because fund managers putting that money to work could boost share prices.
Then again, even last year's record flows into stock funds didn't keep the S&P 500 and the Nasdaq Composite from falling 9% and 39%, respectively. Consequently, in the often perplexing world of Wall Street, pessimists can make the case that high inflows point to a near-term high.
If there's any constant, it's that at least some fund investors won't buy shares of a stock fund until they think they have a reasonable chance to earn money in the short term. While the reflex is understandable, waiting to invest until you're brimming with confidence -- rather than investing a set amount each month -- can be costly because you're usually most confident near a market top.
This year's fund flows are rising and falling nearly in lockstep with the Nasdaq Composite. Aside from May, each month stock fund flows have followed the Nasdaq into the red or black.
Going With the Flow
Cash flows to stock funds ($billions) tracking tech stock prices
Stock-Fund Cash Flows Nasdaq Composite Return
January $24.6 12.2%
February -3.1 -24.2
March -20.6 -16.6
April 25.0 15.0
May 5.8 -0.3
June 13.0 2.4
July -2.3 -4.5
Source: TrimTabs.com, ICI and Baseline/Thomson Financial.
It's easy to see why fund investors seem shy. From 1995 through 1999 the S&P 500 gained at least 20% each year -- the index's best four-year stretch ever. But the tech sector's subsequent collapse has whittled many investor's gains.
The Nasdaq is down 50% over the past year and the average large-cap growth fund, a core holding in most investors' portfolios, is averaging just a 0.3% annual gain over the past three years, according to Morningstar.
Historically, large-cap stocks have averaged an 11% annual gain, but the Vanguard 500 Index fund is averaging just a 2.1% annualized gain over the past three years. The Wilshire 5000, a broad index designed to measure the entire U.S. market's performance, is averaging a 1.8% gain over the past three years. By comparison, the average taxable bond fund is averaging a 3.7% gain over the same stretch, according to Morningstar.
"It has been an unusually bad period in the market," said Jim Schmidt, manager of the John Hancock Financial Industries fund, summing up the market's malaise in this week's 10 Questions interview. "I don't remember a period in the last 15 years where it has taken that long to get your money in the stock market; where you could have bought a diversified set of stocks and two years later still been under water."
One of the core tenets of fund investing is that successful investors tend to buy good funds and hold them for the long term. Through the market's continuing stumble, redemptions have been relatively modest in relation to the trillions of dollars in funds' coffers. Still, inflows are down.
The upshot: Most fund investors are holding today, but precious few are buying.
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