Wednesday March 21, 2:42 pm Eastern Time
Investors yank record cash from stock funds
(UPDATE: Recasts; adds byline, details throughout)
By Cal Mankowski
NEW YORK, March 21 (Reuters) - As stocks skidded toward two-year lows in February, investors yanked a record amount of money out of U.S. stock mutual funds, with many seeking refuge in safer money market funds, research firm Lipper Inc. said on Wednesday.
Investors pulled $11.4 billion from stock funds in February, as the technology-heavy Nasdaq composite index (^IXIC - news) posted its third-worst month ever, down more than 22 percent. Investors fled to safe havens, like money market funds, which took in a net $45.8 billion in February, Lipper said.
Outflows from stock funds are rare. February was only the fourth month since the summer of 1989 that investors yanked out more money than they put into stock funds. Some industry analysts are calculating that March will also see net outflows as stocks continue to sink -- as much as $17 billion, according to some estimates.
The February outflows from stock funds were the first since August 1998, when a Russian debt default spurred a global financial crisis. The latest outflows topped the previous record of about $8 billion in October 1987, Lipper said.
The 12-month decline in stock prices is testing the resolve of investors.
``The buy-and-hold approach remains largely unshaken,'' said Don Cassidy, senior analyst at Lipper. ``But on the margin, we are seeing rising evidence of fund investors buying in rising markets and selling in falling ones.''
The picture is not as grim as during the 1987 market crash, Cassidy said. The February outflows represented only about 0.3 percent of $4 trillion in stock fund assets, whereas in October 1987, redemptions accounted for about 5 percent of fund assets.
While the February outflows were small on a percentage basis, they delivered yet another blow to investor psychology, which has been battered by a year-long slide in stock prices and repeated reductions in the outlook for corporate profits.
The Dow Jones industrial average (^DJI - news) fell about 3.6 percent in February, while the Standard & Poor's 500 Index (^SPX - news) retreated by more than 9 percent. The declines, which have continued into March, followed a disappointing 2000, during which all the major indices fell for the first time since 1990.
The Dow industrials fell 80 points to 9,641 on Wednesday, while the Nasdaq and S&P indexes were little changed.
``Obviously, it's made things difficult for the (fund) industry,'' said Eli Suarez, vice president for institutional services at U.S. Global Investors in San Antonio. When portfolio managers first experience redemptions they sell stocks they were thinking of dumping anyway. But as outflows continue, they have to sell holdings they were intent on keeping, he said.
The U.S. Global Investors stock funds, which total about $400 million in assets, have experienced redemptions in some funds but not every one. Redemptions were worse in the fourth quarter of 2000, Suarez said. The firm's money market and other fixed income funds, which are larger than the stock funds, have benefited from investors' new-found conservatism, he said.
Investor caution has to spread to other sectors. Value funds, which invest in companies that are inexpensive based on financial ratios such as the price-to-earnings ratio, book value or return on equity, were the only type of diversified domestic stock fund to take in new cash: $7.7 billion. Balance funds, which hold both bonds and stocks, also saw a $500 million inflow.
Growth funds, which invest in fast-growing companies, had outflows of $4.2 billion, including $2.5 billion in outflows at growth funds that invest in the largest companies by market value. That's notable because these funds were investor favorites during the late-1990s stock market boom, Lipper said.
Lipper, a unit of Reuters Group Plc (quote from Yahoo! UK & Ireland: RTR.L) (NasdaqNM:RTRSY - news), said that once-hot sector funds that invest in specific industries, suffered net outflows of nearly $2.0 billion, including $1.6 billion from science and technology funds.
Fixed income funds, other than money market funds, had net inflows of $1.5 billion. High yield funds had inflows of more than $800 million, which was 80 percent less than the strong January total, reflecting increased concerns about defaults, Lipper said.
A year ago, flows into stock funds were booming. The Investment Company Institute, a trade group for the industry, reported net flows to stock funds set a record at $53.68 billion in February 2000.
The picture is different now. TrimTabs.com, a Santa Rosa, Calif.-based data service, calculated that as of March 16, the current month would see an outflow of $17 billion from stock funds, assuming the trend through midmonth continued.
Investors appeared to be waiting for the stock market to stabilize, said Carl Wittnebert, research director at TrimTabs.com. People used to buy stocks when the market declined, he said, but ``they're not buying the dips when the market is in free fall.''
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