Stock funds are sagging and fund investors are bailing. This could be the beginning of a fairly vicious cycle.
In a continuing trend, stock funds lost more money to redemptions than they took in last week. In the five trading days ended Thursday, stock funds were in net redemptions to the tune of $11.9 billion, according to the latest figures from liquidity tracker
TrimTabs.com. While these numbers represent early estimates, and the firm did have to reduce its outflow estimates from February, they do illustrate investors still slackening appetite for stock funds.
This redemption trend is worth watching whether you own stocks directly or through funds, because it could have repercussions beyond the fund world. Here's how: Steady redemptions could send tech and growth stocks lower if growth managers are forced to sell their top picks and raise cash to meet redemptions -- a scenario raised in this column on
March 2. Over the five trading days ended March 15, bond and balanced funds, which combine stock and bond holdings, took in $400 million more than they lost to redemptions, while money market or cash funds took in a whopping $6.8 billion. This movement of cash from stock funds and into bond and cash funds is becoming familiar.
Last year, stock funds averaged a $4.7 billion weekly in-flow according to TrimTabs.com, but this year that's down to just $800 million. At the same time, average flows to bond and money market funds are sharply higher than last year's.
2001: A Less Risky Odyssey
This year's average weekly cash flows reflect a taste for less risky fare as
fund investor lick their wounds and prepare to pay steep tax bills.
Figures in billions of dollars. |
| U.S. Stock Funds |
| 2001 | $0.8 |
| 2000 | 4.7 |
| 1999 | 2.9 |
| Bonds/Balanced Funds |
| 2001 | $0.4 |
| 2000 | -1.5 |
| 1999 | 1.6 |
| Money Market Funds |
| 2001 | $5.7 |
| 2000 | 1.8 |
| 1999 | 3.2 |
| Source: TrimTabs.com. Data through March 15. |
Rising interest in bond and cash funds is driven in part by investors' efforts to stockpile cash to pay their April 15 tax bills. After all, funds paid out a record $345 billion in taxable capital-gains distributions, raising many investors' tax burdens. The previous record was $238 billion in 1999, according to the
Investment Company Institute, the fund industry's largest trade group.
But tax maneuvering alone doesn't explain the migration of money from stock funds.
So far this month, U.S. stock funds are in net outflows by $13 billion. Over the same period a year ago, these funds took in more than $35 billion, according to TrimTabs.com. On the other hand, bond and balanced funds, which are $1.1 billion in the black so far this month, were nearly $14 billion in the red during the same period a year ago.
An About Face
So far this March's fund flows illustrate a major shift in sentiment.
Figures in billions of dollars |
 | March 2001 | March 2000 |
| U.S. Stock funds | $-13.1 | $35.4 |
| Bond and Balanced funds | 1.1 | -13.8 |
| Source: TrimTabs.com. Data through March 15. |
Investors' disinterest in stock funds is surely also being driven by steep losses among growth and tech funds, which rode the sizzling tech sector to stellar returns in 1998 and 1999 and record in-flows over the past two years. But frothy valuations, slipping demand and dwindling earnings at tech shops have made these funds' tech stakes a burden. The average big-cap, mid-cap and small-cap growth funds have lost more than a third of their value over the past 12 months, according to
Morningstar. It's even worse for tech-sector funds, down a stunning 61.4% over the past year.
Mutual fund cash flows follow performance, if gradually. Not surprisingly, portfolio managers who run index funds and less aggressive or value-oriented stock funds are reporting rising in-flows. The average big-cap value fund has eked out a 1.1% gain over the past 12 months, according to Morningstar.
One anecdotal but compelling barometer might be which funds investors are now researching. Last year the most widely viewed fund reports on
Morningstar.com, a fund-tracking Web site, were routinely from shops like
Janus, whose high-octane, tech-stuffed funds rang up fat returns in 1999.
Today the Denver firm, which has shuttered several funds and is seeing monthly outflows now, still has three funds among the site's 10-most viewed reports. But the top two are
(VFINX Quote - Cramer on VFINX - Stock Picks)Vanguard 500 Index fund, which inactively tracks the S&P 500 index, and
(OAKLX Quote - Cramer on OAKLX - Stock Picks)Oakmark Select, a mid-cap value fund. The third most popular fund report is that of the
(VTSMX Quote - Cramer on VTSMX - Stock Picks)Vanguard Total Bond Market Index fund, which tracks the
Lehman Brothers Aggregate Bond Index.
If growth funds and the tech stocks they love don't show signs of life anytime soon, it's reasonable to expect their shareholders to keep voting with their feet as they reduce their exposure to the tech sector -- still an overweighting in many portfolios. When outflows hit value funds in 1998 and 1999, managers weighed down their own stocks and funds when they had to sell shares to cash out investors. It makes sense to keep an eye on fund flows this year, since the same bleak cycle could play out among the growth and tech set.
The Junk Pile
For better or worse, fund shops are still rolling out health care and biotech sector funds, even though the sector is buckling. Thanks to a surging biotech sector, last year health funds lapped every other stock fund category, ringing up a 55.4% gain, compared with a 9.1% loss for the
S&P 500, according to Morningstar. In a familiar pattern, investors' cash followed hot returns. The then 40-fund category took in more than $13.5 billion last year, smashing the previous record for in-flows, which was about $5 billion set in 1998.
Now that biotech stocks have cooled and the average health care fund is down a whopping 23.7% already this year, that serious dip is erasing many of last year's gains, leaving the category down 7.2% over the past 12 months.
Still, in the past 45 days four new health funds have rolled out or registered with regulators. In February the exchange-traded
iShares Nasdaq Biotechnology Index fund and the
Turner Health & Biotech fund were born. And this month
John Hancock Funds launched the
John Hancock Biotechnology fund to complement its struggling
(JHGRX Quote - Cramer on JHGRX - Stock Picks)John Hancock Life Sciences fund.
And
Oak Associates, best known for its tech-investing acumen, filed paperwork with regulators last Thursday to launch the
Oak Health Sciences fund on June 1. Are these funds well timed or are these funds just latent performance chasers? Time will tell.
Ian McDonald
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