Cash Gushed Out of Stock Funds at Record Clip in September

Early estimates say fund investors yanked a record amount of money from stock funds in September, underscoring investors' heightened uncertainty following the Sept. 11 terrorist attacks.

Redemptions from stock funds outpaced investments by $32 billion in September, topping March's $21 billion net outflow, according to preliminary figures released by fund tracker Lipper. Barring some vast miscalculation, September will be stock funds' third-straight month of outflows, which last happened between July and September 1990 prior to the Gulf War. Investors continue to prefer lower-risk fare like bond funds, which netted $7.3 billion last month, and money market funds, which gobbled up more than $57 billion, by Lipper's tally.

The fund-flow news isn't all bad, however. In the first 11 days of this month, stock funds netted more than $11 billion, according to rough numbers from TrimTabs.com, whose estimates are based on cash flows to fund shops representing about 15% of stock fund assets.

Hello, I Must Be Going September brings record outflows
Stock Funds	Bond Funds	Money Market Funds
$-32 billion	$7.3 billion	$57.6 billion
Source: Lipper.

The outflow numbers may move some sages to advocate buying stocks, rolling out Warren Buffett's mantra that you should be greedy when others are fearful and vice versa. In any case, they illustrate investors' flagging conviction in stock investing, marking a tectonic shift in psychology from last year.

At this time last year, stock funds had netted $273 billion, compared with just $20.5 billion so far this year. Less risky refuges like bond funds and balanced funds have been raking it in, gaining almost $69 billion this year, reversing about a $76.6 billion net outflow at this point in 2000. Even more telling is the gush of cash investors are stuffing into their savings accounts, which saw $318 billion in new cash through the first nine months of this year, compared with $110 billion over the same stretch last year.

Stocks. Riiiiiiiiiiiiiiiiiiiight. Investors' appetite for stock funds isn't what it used to be
Fund Category	2001 Cash flow ($billions)	2000 Cash flow ($billions)
Stock	$20.5	$273
Bond/Balanced	68.6	-76.7
Retail Money Market	74.8	72.1
Savings Accounts	318	110
Source: Source: Trim Tabs. Data through Oct. 11.

While fund flows are a poor divining rod for those trying to predict the market's next move, they can be an accurate barometer of investor sentiment. As usual, many investors appear to be reacting to the returns they've seen over the past year or so. This pattern perseveres, even though it essentially assures a buy high, sell low approach.

Since the Nasdaq's peak last year, the combination of thin-air valuations, a sagging economy and last month's terrorist attacks have walloped stocks and stock funds. The S&P 500 is down some 27% over the past 12 months, and the average U.S. stock fund is down more than 18% over the past 12 months. The average taxable bond fund has risen more than 7%.

Tech-heavy growth funds have fallen hardest; they had net outflows of $12.8 billion last month, compared with $2.1 billion outflows for their less ravaged, tech-light value peers.

Looking Good Bonds continue to outperform
	1-Year Return	3-Year Return
Avg. Bond Fund	7.4%	4.5%
Avg. U.S. Stock Fund	-18.2	6.4
Avg. Foreign Stock Fund	-22	1.9
S&P 500	-26.6	2
Source: Source: Morningstar. Returns through Oct. 17.

The connection between cash flows to funds and performance has been particularly close this year. Through the end of September the tech-laden Nasdaq had six down months in 2001. In all but one, stock funds saw net outflows.

Flows Follow Returns Investors write more checks when stocks are heading north
	Stock-Fund Cash Flow in billions	Nasdaq Composite Return
January	$24.6	12.2%
February	-3.1	-24.2
March	-20.6	-16.6
April	25	15
May	5.8	-0.3
June	7	2.4
July	-1.2	-6.2
August	-5.3	-10.5
September*	-32	-16.3
*Lipper estimate. Source: Sources: Investment Company Institute and Baseline/Thomson Financial.

The bottom line is that many fund investors are taking a wait-and-see approach with the stock market. That approach will only be solidified by the dreary third-quarter statements they just received, even though stock valuations are far more reasonable than 18 months ago, when it seemed far easier to write the check.

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