Stock Funds to Post Biggest Withdrawals Ever

BOSTON (TheStreet) -- U.S. stock mutual funds are forecast to set a new record for investor withdrawals in August as Americans recoil from the biggest equity-market slump in three years and the first-ever downgrade of Treasuries.

The prediction, from analyst Kevin McDevitt at mutual-fund tracker Morningstar, comes after July's $22.9 billion in outflows, the most since the peak of the credit crisis in October 2008, when investors pulled $28 billion from U.S. stock funds. "With August off to a very rocky start, this trend is sure to continue with deeper outflows to come."

Investors have withdrawn a net $200 billion from U.S. stock mutual funds over the past five years. Total fund industry assets peaked at $4 trillion in late 2007, but the subsequent stock-market crash a year later, the prolonged recession and last year's so-called flash crash have contributed to skittish investor behavior that has resulted in outflows of about $500 billion since the peak, according to Morningstar.

That's roughly equivalent to the assets of the seven largest U.S. mutual funds, a list that includes Pimco Total Return (PTTRX), SPDR S&P 500 ETF (SPY) and Fidelity Contrafund (FCNTX).

Outflows in June and July came despite the fact that most diversified U.S. stock funds declined an average of only 6% in the three months through July, so it wasn't the market performance that drove them away.

"It's taken less and less to spook investors over the years," McDevitt said, and the prospect of the threat of the U.S. defaulting on its debts which began to gain credence at the end of July because Congress couldn't agree on a debt ceiling was enough for many of them to throw in the towel.

"Investors' tolerance for uncertainty and risk has really changed," he said, and most of the money that has been coming out of U.S. stock funds won't be coming back, he said.

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