Stock Funds Set Another Outflow Record

The bleak early estimates were accurate: A record sum spewed out of stock funds last month.

Thanks more to flagging investments than a spate of redemptions, outflows from stock funds totaled $29.5 billion last month, topping the $20.7 billion record set in March. Still, that figure amounts to less than 1% of the trillions invested in stock funds, according to the fund industry's largest trade group, the Investment Company Institute.

At the same time, less-risky bond funds took in $8 billion, and money market funds gobbled up $53.2 billion, with $35 billion coming from institutional investors. The top 10 fund categories last month all had bond labels, according to the Boston fund consultancy Financial Research.

Early and rough cash-flow estimates for this month pointed to a modest $2.7 billion inflow for stock funds this month through last Thursday, according to liquidity tracker TrimTabs.com.

The September exodus from ravaged stock funds, down nearly 17% on average over the past 12 months, might not come as a shock because it comes on the heels of last month's terrorist attacks. But the fallout does further illustrate the clearest trend in this year's messy market: Fund investors' confidence in stocks is shot.

An Exodus to Remember Stock-fund investors piled out in droves last month (figures in billions of dollars)
	Sept. Cash Flow	YTD 2001 Cash Flow	YTD 2000 Cash Flow
Stock Funds	-$29.5	$13.5	$273.5
Taxable Bond Funds	8.0	59.2	-30.9
Money Market Funds	53.2	266.5	60.1
Source: ICI. Figures in billions of dollars.

September was the third straight month of outflows for stock funds, and this hasn't happened in 10 years. Stock funds took in a record $309 billion last year; the S&P 500's 27% fall over the past 12 months tops any calendar-year loss in the past 25 years, according to Chicago fund tracker Morningstar. Because many investors showed up just in time for a drubbing, some observers have predicted a rush for the exits. In reality, however, the outflows are due more to a dearth of fresh money than to steep redemptions.

Investments into stock funds fell to $67.8 billion last month, down from $97.9 billion in August. At the same time, redemptions fell to $96.3 billion from $102.7 billion in August.

Even if fund investors aren't giving up on their stock funds en masse, their appetite isn't what it used to be. Through Sept. 30 stock funds took in $13.5 billion this year, compared with $273.5 billion over the same stretch in 2000. Taxable bond funds' cash flows are in the black by some $59 billion, compared with outflows last year, and money market funds have taken in $266.5 billion this year -- more than four times their 2000 pace.

Some might worry that these outflows could sink stock prices by forcing fund managers to dump stocks in order to cash out exiting shareholders. That shouldn't be a problem for most fund managers, though, because September's outflow added up to less than 1% of assets, compared with outflows that added up to more than 3% of assets after Black Monday in October 1987. The average stock fund should be able to cover redemptions because it had 5.3% of its money in cash on Sept. 30.

That said, redemptions are no doubt becoming an issue for some funds. Three of the five biggest outflow months on record have come this year, according to the ICI. And since fund flows typically follow performance, it's tough to imagine outflows slowing while stocks are in the dumps.

A Dubious Honor Three of the worst one-month outflows have come this year
Month	Outflows in Billions	Percentage of Assets
September 2001	-$29.5	0.9%
March 2001	-20.7	0.6
August 1998	-11.6	0.4
October 1987	-7.5	3.1
August 2001	-4.8	0.1
Source: ICI.

As usual, funds with higher near-term returns are netting investors' checks. The average taxable bond fund is up 7.8% over the past 12 months, compared with the average U.S. stock fund's nearly 17% loss. So it's not surprising that bond funds have had positive inflows, just as it's not shocking to see punch-drunk tech and tech-heavy growth funds in outflows after capturing the vast majority of last year's record sales. The tech-laden Nasdaq has had six down months so far this year, and cash flows to stock funds have been negative in five of those months.

Large-cap growth funds have lost a third of their value over the past 12 months, thanks to their big appetite for tech stocks. That compares with just a 4.1% loss for tech-light, large-cap value funds, according to Morningstar. Consequently, big-cap growth funds suffered outflows of nearly $8 billion last month, compared with a $1.7 billion net outflow for their value peers, according to fund tracker Lipper.

Flows Follow Returns As usual, investors prefer to write 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	25.0	15.0
May	5.8	-0.3
June	7.0	2.4
July	-1.2	-6.2
August	-5.3	-10.5
September	-29.5	-16.3
Source: ICI and Baseline/Thomson Financial.

Last month's record outflows will give dry powder to pessimists and optimists alike. Pessimists will say a wave of outflows from growth funds will trigger a wave of selling in the already battered tech sector. Optimists will say that once Main Street investors turn their backs on a fund category, it often signals a bottom and augurs sunnier days ahead.

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The most useful take-away from these flow figures, however, is that chasing returns with your investments is a loser's game. Money gushed into funds at Nasdaq 5000 far faster than it does today at Nasdaq 1699, highlighting the risks of investing only when the sun is shining on Wall Street.

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