Cash is building on the sidelines and average daily inflows to mutual funds are nearly twice what they were last year...despite all the gloom and doom we have been hearing and all the turbulence we have endured.
Money will be coming in on auto-pilot for years to come. This bull is NOT going to die.
As Volume Declines, Fund Investors Ask:
Where is the Money Going? Senior Writer
By Ian McDonald 5/24/00 6:45 PM ET
Has anybody seen a few billion bucks laying around?
Despite continued bloodletting on Wall Street, cash is gushing into U.S. stock funds at a faster rate than in 1999. But if all this fresh green is going into stock funds, why is trading volume on the Nasdaq and New York Stock Exchange plummeting? Where is all that money going?
Like the magician who pours a half gallon of milk into a top hat, then promptly makes it vanish, the situation isn't easy to explain. Portfolio managers, traders and mutual fund watchers have several plausible theories. The most common is probably the simplest: Many mutual fund managers are letting new cash pile up rather than put it to work in a sagging market.
"With tech having such a big question mark next to it right now, a lot of portfolios seem frozen," says Doug Cliggot, U.S. equity strategist at J.P. Morgan. "A lot of managers are doing a lot of sitting and looking."
"Unless there's some big hole in the market I don't know about, then cash is building up," adds Charles Biderman, president and publisher of TrimTabs.com, a liquidity-tracking Web site.
If fund managers are being shy, fund investors certainly aren't. From Jan. 1 through last Thursday, they're investing in stock funds at a clip that nearly doubles the daily average from last year, according to TrimTabs.com.
Even recent volatility hasn't spooked investors. On average, daily flows into domestic stock funds have topped $1 billion in March, April and, so far, in May. Experts say that's not surprising. "There's a lot of inertia with fund sales," says Burt Greenwald, a Philadelphia-based fund consultant. He and others note that systematic investments in 401(k) and other retirement vehicles tend to keep fund flows strong even through bleak markets. "Fund investing is something people do out of habit," says Morningstar research director John Rekanthaler. "People have some vague sense that they're losing money, but they're not looking at it everyday."
Flagging trading volume shows that fund managers aren't necessarily plugging those auto-pilot dollars into stocks. Aside from scattered big days, volume on both the NYSE and Nasdaq have been sliding sharply since early April.
Recent data on mutual funds' cash levels won't be available for some time, but there is anecdotal evidence that fund managers are slow to invest the cash that comes in.
"We let cash build up because we had serious concerns about the outlook for the economy," says Michael Petrino, who co-manages StockJungle.com's Community Intelligence and Market Leaders funds with Gordon Gustafson. The Community Intelligence fund was fully invested at launch last November. Toward the end of the first quarter, Petrino says he started to let cash pile up. The fund's cash position has been as high as 35%. Last week, he and Gustafson cut the fund's cash position from 25% to about 12% though it has risen to 15% this week.
The $8.6 billion American Mutual fund, managed by the American Funds group, had a 23.5% cash stake at the end of the first quarter. The fund often keeps a significant part of its portfolio in cash, but first-quarter levels were at the top of its historical range, says Morningstar analyst Kunal Kapoor, who covers the fund.
"We've been cautious and have had a hard time finding a lot of opportunities that are suitable for this fund," says American Funds spokesman Chuck Freadhoff, noting that the fund focuses on dividend-paying stocks and avoids most pricey tech stocks.
When the market was rising steadily, there was a severe performance penalty to be paid for holding too much cash. But that's not the case with stock prices falling. "Last year time was money, but today you don't get a sense that managers are rushing to put money to work. Today the idea is, 'If I don't buy this stock now, I might get it a lot cheaper next week,'" says Morningstar's Rekanthaler.
A trader with a bird's-eye view of money managers' habits concurs.
This year "has a different feel," says Tom Hearden, senior equity trader with Strong Funds in Milwaukee, who sees a more cautious approach at his firm and others. "If I get an order for 150,000 shares, unless I have a strong feeling, I'm not going to trade it in a block. You see more people breaking up orders into smaller pieces. If you took a decent survey of managers, you'd see cash levels going higher."
Managers aren't necessarily making a decision to hoard cash. Rather, their hesitance to buy could be due to selling pressure and downward momentum in the market. On Monday, several fund managers admitted that they weren't buying or selling as the market gyrated.
"I wouldn't be surprised if a lot of tech and aggressive fund mangers are having a hard time finding places to put money," says Tom Stevens, chief investment officer at Wilshire Asset Management in Santa Monica, Calif.
Reticent fund managers aren't the only ones to blame for lower volume in the stock market. Uncle Sam also had a hand. Biderman estimates some $55 billion left the market in April to pay capital-gains taxes following 1999's spectacular market gains. He also cites selling by foreign investors fleeing the plummeting euro. Things could get even stickier for the markets and fund managers as the temperature rises. Fund flows and trading volume typically dip in the summer months.
"I think it's going to be a long, slow summer," says Strong's Hearden.
Year: Average DAILY inflows ($ mills)
into mutual funds
1998 580
1999 780
2000 1400
|
