Retail turns tail
Mad2
Investors in Mutual Funds Appear
To Have Hit Their Breaking Point
By AARON LUCCHETTI and TOM LAURICELLA
Staff Reporters of THE WALL STREET JOURNAL
After patiently waiting for a rebound in stock prices during the past two years, a growing number of disgruntled investors appears to be giving up hope.
"Fear is rampant," says Milton Stern, a financial adviser in New York who fielded half a dozen phone calls on Friday from clients who wanted to sell stock mutual funds. More investors, he says, are reaching "a breaking point where they say 'I can't take this anymore.' "
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As they watched the brutal selloff last week, some investors in mutual funds, normally a buy-and-hold bunch, decided they have too much money in stocks and needed to do something about it right away. In the week ended Wednesday, some $11 billion in net assets flowed out of U.S. stock funds, said AMG Data Services in Arcata, Calif.
In the last nine weeks, firms that report their data to AMG have suffered $29 billion in investor defections from their U.S. stock funds, nearly 2.4% of their assets under management according to a report by Banc of America Securities. On a percentage basis, that defection would eclipse the amount that left stock funds after Sept. 11, 2001, as well as the amount that went elsewhere during the global financial crisis of 1998.
In October 1987, investors redeemed approximately 3.1% of their stock-funds assets, according to the Investment Company Institute, a Washington fund trade group.
Bob Byrd, a high-school algebra teacher in Greenfield, Ind., reached his breaking point on June 25. The 53-year-old had been invested in stock mutual funds since the early 1990s, but after losing about two-thirds of the money in his 403(b) retirement plan in the past two years, he decided to get out.
"If I really want to retire in two years, I can't be wrong" betting on stocks to bounce back, he recalls thinking to himself. "Even if I miss a rebound, I can stay in fixed-income and retire" on time.
So Mr. Byrd sold his stock funds run by Franklin Templeton Investments, State Street Research & Management and T. Rowe Price Associates, moving the bulk of his six-figure retirement account into money-market and bond funds.
"This market has been trashed so bad, it makes me very suspicious of what goes on on Wall Street," says Mr. Byrd, who says his confidence won't be bolstered until some executives or analysts are proven guilty of crimes and go to jail.
Like many investors, Mr. Byrd is shell-shocked by the deepening losses. "This is craziness -- two Fridays ago, the market went up 300. Now it's down 300. It's not making sense." He's now taking the advice of his bearish younger brother, Richard, a stockbroker who thinks the Dow Jones Industrial Average may fall at least another 500 points before bottoming out.
The new pessimism marks a big shift in the sentiment of individual investors in mutual funds. Even as the market started declining after March 2000, they remained steadfast, putting net new money into stock funds in 22 of 27 months through May, according to the ICI. Much of it has come through automatic investment plans and retirement vehicles such as IRAs and 401(k)s.
Now, investors seem to be worn down. More than $10 billion of net assets fled from stock mutual funds in June, according to estimates from mutual-fund tracker Strategic Insight. ICI will release its June numbers later this month.
The recent defection from stock funds is the largest in sheer size and as a percentage of total assets since AMG began keeping track in 1992. While AMG's figures are preliminary and don't include data from the three largest stock-fund companies -- Fidelity Investments, Vanguard Group and Capital Research & Management -- they show the extent of investors' concern. Fidelity and Vanguard both indicated they had outflows in June and declined to provide specific numbers for July. Capital Research couldn't be reached for comment.
Even through Thursday, every category of diversified stock fund was posting double-digit losses for the year except for the average small-cap value fund, which was posting a 9% decline, according to Morningstar Inc. The average large-cap growth, large-cap blend, midgrowth and small growth funds are all down more than 20% since the year began.
Heavy damage has been inflicted on the most widely held stock funds. At Fidelity Investments, the giant Magellan Fund is down 26% this year, Growth & Income is down 22% and Blue Chip Growth is down 28%. At Putnam Investments, the $20 billion Voyager Fund is down 28% and the Putnam Fund for Growth & Income is down 23%. In Denver, the flagship Janus fund is down 27%.
The longer-term numbers on many of these funds are nearly as bleak. Over the past three years, Magellan is down an average 14% per year, Voyager is down 15% and the Putnam Fund for Growth & Income has lost investors an average of 11% per year.
With performance down, many stock-fund managers are becoming worried that so many investors will bail that the funds will have to sell stock at depressed prices in order to meet redemptions. After getting a large $7 million sell order recently from investors at one big financial-services firm, Peter Zuger, manager of State Street Research MidCap Value Fund, wondered how many more investors might leave. "I've been thinking about redemptions a lot in the last few weeks, and I'm sure other managers are too."
There have been some havens, however. Fidelity's $17 billion Low-Priced Stock fund, for example, is only off 5% this year. And bond funds are still in positive territory, attracting many investors. Vanguard GNMA Fund, which invests largely in mortgage-backed securities, is up 5.8% this year.
On Friday, as stock markets stumbled to the end of a painful week, investors called their fund companies and brokers for advice and to take action. One of Mr. Stern's clients told him it was time to sell off some of her battered stock funds. "I can't just sit here and do nothing," she explained to him. The New York financial adviser sold shares in four of her stock funds and moved the proceeds to cash. Her allocation to stock funds will decline to about 42% of her portfolio from 55%.
"It's probably the wrong thing to do right now, but that's what I want to do," Mr. Stern recalls his client telling him.
Ronald Roge, a financial adviser in Bohemia, N.Y., fielded a call on Friday morning from a longtime client in her 60s, who told him she needed to be more conservative in her investments so she could sleep better at night. Mr. Roge sold some of her Thornburg Value Fund and Excelsior Value & Restructuring Fund, moving the proceeds to bond funds and reducing the client's stock allocation to about 48% from 53%.
At fund firms, representatives struggled to keep up with the flood of phone calls coming in from clients. At T. Rowe, calls were running about 33% higher than usual and at Banc One Investment Advisors, Bank One's money-management arm, call volume was up 35% to 40%. "We are getting a lot of people just saying I want out," says Richard Jandrain, chief investment officer for stocks at Banc One. "There's no way you'll change their mind. They're telling you what to do."
Part of the pick-up in concern could come from the fact that investors have just received their second-quarter statements from financial-services firms, says James Gately, a senior executive at Vanguard in charge of the firm's direct investor services group. "Anybody who entered the market since the mid-1970's is facing their first bear market of this degree. Many investors have never experienced anything like this."
T. Rowe Price Group Inc. said its second-quarter earnings were nearly flat at $51.9 million, or 40 cents a share, but the results fell two cents a share short of analysts' expectations.
As of 4 p.m. Friday on the Nasdaq Stock Market, T. Rowe Price shares were down 8.4%, or $2.32, at $25.26.
The Baltimore asset-management company said advisory fees fell $8.4 million from the second quarter last year, to $190 million, largely driven by a decline in assets under management. Assets under management fell to $148.8 billion from $158.6 billion in the same quarter last year, the company said. In the second quarter of 2001, T. Rowe reported earning $51.2 million, also 40 cents a share.
Thomson First Call had reported a consensus earnings estimate of 42 cents a share for the quarter.
-- Theo Francis and Greg Ip contributed to this article.
Write to Aaron Lucchetti at aaron.lucchetti@wsj.com and Tom Lauricella at tom.lauricella@wsj.com
Updated July 22, 2002 |
