Stock Fund Redemptions Continue

Whether they're raising cash to pay their taxes or just fed up with losing money, fund investors are still yanking money out of their sagging stock funds. The news isn't shocking, but it could be painful for stock investors if this pattern of redemptions continues.

Outflows Archive

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Janus Outflows Soar

No Redemption: How Prolonged Growth/Tech-Fund Outflows Could Sink the Market

In the five trading days ending last Thursday, investors' redemptions from stock funds outpaced their investments for the fourth consecutive week, according to the most recent estimates from liquidity tracker TrimTabs.com. The average stock fund is in net redemptions so far this year by this latest tally and is striking a slightly more defensive pose by raising its cash stake.

While these estimates, drawn from a sample of about 15% of stock funds, often change, it seems likely that March will be the second consecutive month of outflows for stock funds when final numbers are available. If stock funds' net redemptions continue in the weeks and months after investors pay their taxes on April 16, this burgeoning pattern could put added pressure on already battered stocks as fund managers sell shares to cash out their investors.

In the five trading days between March 30 and April 5, U.S. and global stock funds were in net outflows to the tune of $8.8 billion, while bond and balanced funds lost about $800 million in outflows, too. About $8.7 billion flowed into money market or cash funds.

Out Like a Lamb, Indeed Investors yanked money from their stock and bond funds and stuffed them in money market funds. Figures in billions of dollars.
	March 30-April 5 Fund Flows
U.S. Stock Funds	-$7.5
Global Stock Funds	-1.3
Bonds/Balanced Funds	-0.8
Retail Money Market Funds	8.7
Source: TrimTabs.com.

To be sure, it's normal for billions to gush into money market funds at this time of year as investors raise cash to pay their tax bills, which are higher due to a record $345 billion in taxable capital gains distributions last year. But before we blame this exodus entirely on Uncle Sam, let's remember that stock funds' woeful performance is playing a role, too. No stock-fund categories are in the black so far this year, according to Morningstar, and the recently top-selling large-cap growth and tech-fund categories are down 36.5% and 62%, respectively, over the last 12 months.

If we compare funds' cash flows through the first 14 weeks of this year with the same period last year, we find numbers that can only be called stark. At this point last year, investments into stock funds outnumbered redemptions by nearly $120 billion. But so far this year, redemptions are topping investments into U.S. and global stock funds.

What a Difference a Year Makes If we compare fund flows through the first 14 weeks of this year with the same period last year, the difference is stark. Figures in billions of dollars.

Source: TrimTabs.com.

Fund flows are always closely watched as a barometer of investor sentiment. While some might see this outflow as a sign that pessimism and stock prices are bottoming, others might see it as the start of an ominous trend that could keep already ravaged stocks down.

Here's why: If outflows persist for several months, fund managers selling stock to cash out rattled shareholders can add an unforeseen dollop of selling pressure on already battered stocks. This can trigger a vicious cycle where sagging performance begets outflows, begetting even worse performance and more outflows.

This cycle hurt value funds when their price-conscious style fell from favor in 1998 and 1999. February outflow data indicated that tech- and tech-heavy growth funds like the Janus funds, the top-selling categories in recent years, comprised much of that month's outflows. If money keeps flowing out of these funds for a few months after tax day, those sales could weigh on the tech-laden Nasdaq Composite, which is already down more than 60% over the last year, according to Thomson Financial/Baseline.

Either to meet redemptions or to avoid the stock market's losses, fund managers are raising their cash stakes. The (JAVLX Quote)Janus Twenty fund, for instance, which is closed to new investors and losing money to net redemptions, had nearly 20% of its $19.9 billion in cash at the end of February.

Optimists will thus say that it would take just one or two earnings surprises, bonny economic data reports or some other positive catalyst to trigger a gush of new money into the market. While a wave of funds buying shares could help push stock prices north, there's reason to toss some water on this idea.

The TrimTabs.com report notes that although pension fund managers have raised their cash stakes, stock funds' cash stakes stood at 5.6% at the end of February, up from 5.3% at the end of January. That might sound good, but because the last year's losses have whittled stock funds' assets so severely, a 5.6% cash stake actually translates to only about $3.2 billion, which is the lowest amount of cash funds have had on the sidelines in two years, according to TrimTabs.com.

And if we look at that 5.6% cash position compared to recent history, it still looks like a pretty slim buffer. Over the past five years, stock funds' cash positions at the end of February have steadily declined from 7.4%. The bottom line is that it's not as if fund managers have tons of cash that they're waiting to invest in the market.

All About the Benjamins Stock funds' cash stakes are starting to go up again.
February 2001	5.6%
February 2000	4.1
February 1999	4.9
February 1998	5.7
February 1997	6.5
February 1996	7.4
Sources: TrimTabs.com and the Investment Company Institute.

Once fund investors get their first-quarter account statements over the next few weeks, it's hard to argue that many won't feel better with a healthy cash position themselves.