Cashes to Cashes: Data Show Money Market Funds Ballooning

Record billions of greenbacks gushed into mutual funds last year, but take a closer look at the numbers and you can't miss investors' shriveled confidence in a sagging stock market.

In sum, funds took in a record $434.5 billion last year, according to preliminary estimates released Wednesday by fund tracker Lipper. But 75% of that money went into money market funds or cash accounts. Another 17% of last year's net sales flowed into bond funds. While investors didn't jump out of stock funds en masse, they invested just a net $34 billion in them last year, compared with some $310 billion in 2000.

The upshot: With the S&P 500 and Nasdaq Composite down 20% and 54% over the past two years, respectively, fund investors' faith in the post-bubble stock market is clearly shaken. After annual gains of more than 20% from 1995 through 1999, many are no doubt surprised to see the S&P 500 trailing bonds and in the red over the past three years.

Money usually flows into fund categories that have performed best over the past six months or so, even though we're all regularly told to spread our money among a diverse blend of funds no matter what sector or style is leading the market. This trend explains last year's sales trends.

The average U.S. stock fund has fallen in each of the past two years and sports just a 2.5% annualized gain over the past three years, trailing the average bond fund by nearly 2 percentage points, according to Chicago research house Morningstar.

Investors did trust their money with funds that focus on small-caps and tech-light value funds, both of which weathered the past two years' storm better than tech- and tech-heavy growth funds. Small-cap funds gathered a net $28 billion, while redemptions from big-cap funds outpaced investments by some $36 billion. All told, value funds gobbled up $63 billion, compared to $22 billion in net outflows for growth funds.

Stocks? No Thanks After two down years, fund investors aren't clamoring for stock funds

Sources: Lipper and the Investment Company Institute. Figures in billions of dollars.

Tech funds might provide the most stark illustration of investors' shifting tastes in the wake of the Nasdaq's collapse and the perils of chasing hot performance. In 2000, fresh off a 135% gain the year before, they took in a record $51 billion -- equal to more than 40% of the category's total assets at the end of 1999. More than $35 billion of that cash was invested at the sector's top in the first three months of 2000. Since March 31, 2000, the Nasdaq is off 60% and the ravaged category suffered net outflows of $7 billion last year by Lipper's tally.

Instead of aggressive and tech-obsessed fare, investors looked for the opposite. Bond funds, which suffered net redemptions in 2000, took in some $76 billion last year. The $325 billion that gushed into money market funds is from both institutional and individual investors, but because many 401(k) plans' money market purchases are made through institutional shares, it's difficult to delineate how much of the parked money came from each group. No matter where this money is coming from, it won't help fund companies with shrinking revenue because stock funds are typically far more profitable than money market portfolios.

Maybe the most intriguing factoid here is that, despite predictions to the contrary, fund investors haven't thundered out of their tumbling stock funds. In fact, through Nov. 30, stock-fund redemptions were lower than they were a year ago, according to the latest figures from the Investment Company Institute. Of course, sales were down too. Through Nov. 30 stock fund sales stood at $871 billion, compared with $1.2 trillion in the same period a year earlier. So the situation isn't panic; instead, many investors are simply standing pat.

Janus' tech-heavy funds, for instance, have sputtered over the past two years, but outflows from the Denver firm's funds have been light. In a survey of 401(k) investors released Jan. 3, Vanguard reported that 85% of participants say they haven't changed their investment allocation or executed a trade in their account over the past six months.

It seems that much of the cash in money markets will stay put until investors see sustained gains from stocks. This approach flies in the face of the conventional wisdom, where you invest a set amount each month in a broad mix of funds and don't bother trying to time the market -- a fool's errand according to many pros. If you'd like to take the slow-and-steady approach, here's a streamlined, low-maintenance way to do it and here's a blueprint for a diversified portfolio if you're curious.

Techless in Boston

Just as fund investors are a bit shy about buying stock funds these days, some of Fidelity's most prominent funds are far from smitten with tech stocks.

At the start of this month, tech stocks comprised 17.6% of the S&P 500. That's the benchmark for the Boston behemoth's three largest stock funds, home to nearly $150 billion. Each had far less of their portfolio committed to the tech sector at that point: (FMAGX Quote)Magellan (13.5%), (FGRIX Quote)Growth & Income (10.2%) and (FCNTX Quote)Contrafund (6.9%), according to Fidelity's year-end Mutual Fund Guide released Wednesday. The stance suggests that managers like Magellan's Bob Stansky "see no near-term end in sight for the technology bear market," says Jim Lowell, editor of the independent Fidelityinvestor.com newsletter.

Of course, there is a range of opinion at the Boston fund behemoth. The $22 billion (FBGRX Quote)Fidelity Blue Chip Growth, run by John McDowell, had 26% of its money in tech stocks at year-end. That range is illustrated nicely by the firm's two Contrafunds, which both troll for overlooked opportunities. Contrafund I, run by Will Danoff since 1990, had just 7% of its money in tech stocks, compared with 24% for Contrafund II, where Adam Hetnarski has called the shots since last February.

Obviously some of these folks will be right and others will be wrong. The problem is, high manager turnover and a sea of funds make it tough to discern among the Boston shop's stock pickers. One helpful divining rod is Lowell's Fidelity manager rankings, which he just updated.

In ranking these folks, he tracks their monthly returns against a relevant benchmark, as they cycle through different funds over their career with the firm. The top three through the middle of this month are Jamie Harmon, John Muresianu and Paul Antico, who currently manager the firm's (FSCRX Quote)Small Cap Retirement, (FFTYX Quote)Fifty and (FSLCX Quote)Small Cap Stock funds. While the two small-cap funds have tech stakes about even with their benchmark, the Russell 2000, Fidelity Fifty owned exactly zero tech stocks.

Two veteran managers who continue to fare well in Lowell's ratings are Charles Mangum, manager of the (FDGFX Quote)Dividend Growth fund, and Joel Tillinghast, manager of the (FLPSX Quote)Low-Priced Stock fund and our pick for 2001's U.S. stock fund manager of the year.

Who didn't fare so well? Robert Bertelson, who has floundered at the helm of the (FDEGX Quote)Aggressive Growth fund since taking the reins on Valentine's Day last year. Bertelson has consistently trailed his colleagues in Lowell's rankings and will come under continuing scrutiny if the fund continues trailing its peers.

Junk Pile

Whether or not you own shares of Bill Nygren's (OAKMX Quote)Oakmark or (OAKLX Quote)Oakmark Select fund, you should check out his most recent letter to shareholders. Bill's price-conscious approach is always enlightening, and in addition to talking about the market he walks you through his reasoning for buying McDonald's and Merck. He was a runner-up for our manager of the year and got the nod from Morningstar.