So Far, Fund Investors Are Sticking It Out
Tuesday March 13, 3:16 pm Eastern Time
BusinessWeek Online
DAILY BRIEFING
By Amey Stone
<<This was some bear hug. No value investor enjoys days like Mar. 12, when the Dow dropped 436 points and the Nasdaq fell 129 points to close below 2,000. The latter index may be down 62% year-to-year, after its latest disastrous close, but one of the interesting results is that mutual-fund investors remain remarkably calm. They're behaving quite deliberately and rationally -- with no evidence of panic so far.
That's very good news. The staying power of the country's 88 million mutual-fund shareholders has helped provide a ballast for tumbling stocks. ``Mutual-fund investors have clearly been a positive and stabilizing force in the market,'' says Bob Adler, president of research firm AMG Data Services.
But now comes the hard part. While the mutual-fund industry can take credit for adding to market stability by teaching its customers the value of buying on the dips and holding stocks for the long-term, those same customers may soon be wondering if they've been left holding the bag. Should stocks continue to fall, heading for the exit sign may become compelling to individuals, who are famous for buying high and selling low. And if that happens, this bear could really roar. ``None of us know how investors will respond now that buying on the dips in 2000 has not been successful,'' Adler says.
TOO LATE TO SELL? Yes, fund investors have slowed the amount of cash going into stock funds, although the latest net cash flows (new money invested in funds less redemptions) are still running positive. Equity-fund inflows ran $1.8 billion in the first week of March, according to preliminary data from AMG Data Services. That week, 59% of the new cash went into small-cap and aggressive growth funds. Adler sees this as proof that investors are still essentially following a ``buy on the dips'' strategy.
Kirk Kazanjian, author of Mutual Fund Investors Guide: 2001, isn't so sure that's the case. ``Quite frankly, I think a lot of this is shock,'' he says. Kazanjian thinks one reason why fund investors aren't abandoning ship is that they realize if they sell now, they'll miss out on recouping their losses if the market recovers.
For the whole month of February, absent data from a couple of major fund companies, AMG figures show negative cash flows of $3.5 billion, which doesn't strike Adler as a significant level, considering that equity-fund assets total $4 trillion. About $1.6 billion was pulled out of technology-sector funds, but even more was yanked from international funds, which experienced $2.6 billion in net redemptions. And despite rising redemptions in January, that month's fund cash flows were positive. Even though they were running at a rate 40% lower than in January, 2000, they were still in the black.
SAFER PLAYS. While continuing to put some money in equities, investors are pulling cash out of risky sectors and moving it to safer parts of the market in an effort to diversify portfolios. Avi Nachmany, director of research at Strategic Insight in New York, thinks investors still fundamentally believe in the New Economy, despite the recent carnage. That has encouraged them to stay in technology funds. He estimates that mutual-fund investors have redeemed only $1 out of every $200 tech-invested dollars.
For safety, fund investors are turning to money-market funds, which have seen record inflows of $100 billion since the beginning of 2001. Money-fund assets now number $1.94 trillion, according to AMG, up from $1.3 trillion at the start of 1999, $1.5 trillion at the beginning of 2000, and $1.8 trillion on Jan. 3 this year. With long-term interest rates barely higher than short-term rates, investors don't gain much upside by investing in longer-term bonds, says Nachmany. Investors who are buying bond funds are gravitating to the higher-risk corporate and high-yield bond funds as opposed to safer funds holding Treasuries, says Adler.
Meanwhile, the question hanging over the market is whether the pace of fund redemptions will pick up in coming weeks, adding to the market's woes. Funds were experiencing more redemptions as early as January. The average annual redemption rates from stock funds was 26% in January, 2001, up from 22% in January, 2000, according to mutual-fund trade group, the Investment Company Institute.
LONG HORIZONS. But much of this redemption activity is driven by a tiny minority of shareholders who are trading more now than ever. On Mar. 7, ICI released a study showing that 82% of equity-fund owners said they had not redeemed shares from any of their funds in the prior year. An additional 9% did so only once. That leaves just a small number of frequent traders. ``By and large, the level of investors' confidence as reflected in the mutual-fund industry is still remarkably high,'' says Nachmany.
Even if the equity markets continue plummeting, Nachmany doubts fund shareholders will sell en masse. He estimates that two-thirds of all fund assets are aimed at retirement and are held by shareholders with about a 20-year time horizon. Plus, his research shows that mutual-fund investors move their money around more when the market is going up steadily and less during times of downward volatility.
For Nachmany, the Nasdaq's bear market makes the benefits of fund investing only more apparent. ``The era of legalized gambling as a core investment theme is over,'' he says. ``Funds are still gaining many of the refugees of individual stock ownership.''
That may be true. But in a market this brutal, the industry's challenge is no longer to sway investors to turn to equity funds instead of individual stocks. For the industry and the broader market to remain healthy, fund shareholders must remain convinced that they need to remain in equities at all. So far, mutual-fund companies have done a good job of convincing their customers to stick around. But whether fund holders will remain steadfast in a slide this steep is yet another wild card for all investors to worry about these days.>> |
