Funds See More Outflows as Stocks Slip
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Looks like investors' cash flows to stock funds won't consistently rise until stock prices do so first.
In the week ending last Thursday, redemptions from stock funds outpaced investments by some $500 million, according to preliminary estimates released Monday by liquidity tracker
TrimTabs.com
. As usual, the slipping flows appear to be driven by dipping stock prices -- historically fund investors tend to buy shares of stock funds when it's sunny on Wall Street and yank money from funds' coffers when storm clouds gather.
Last week, domestic stock funds eked out a positive in-flow, but foreign stock funds and less racy bond funds also lost more money to redemptions than they gained from new investments. High-yield funds accounted for some of the bond-fund exodus as they posted a $484 million net out-flow in June -- their first outflow month this year.
Cash flows to mutual funds are closely watched as a barometer of investor sentiment, but they can be used to argue for good or bad times ahead. An optimist, for instance, might argue that rising cash flows to funds are positive for the market because fund managers' putting that money to work could boost share prices.
Then again, on the heels of 1999's heady gains a record $309 billion gushed into stock funds and that didn't keep the
S&P 500
and the
Nasdaq Composite
from falling 9% and 39%, respectively. Consequently, in the often perplexing world of Wall Street, pessimists can make the case that high in-flows point to a near-term high.
Though a bonny April boosted flows, May's meek returns and June's losses have sapped investors' fervor. It seems some investors who were burned last year now lack the faith to write a check to a fund company when stock prices are falling or drifting sideways. A look at the monthly cash flows so far this year shows that stock-fund cash flows have risen and fallen with stock prices in general and the Nasdaq Composite in particular.
While understandable, the reflex to chase returns can have a deleterious effect. After all, it can essentially ensure that investors are buying high and selling low.
Though fund flows appear to be less-than-reliable indicators of stock performance, they do show investors' shaken confidence in stark relief. Investors charged into tech- and tech-stuffed stock funds in record droves last year and many of those funds promptly lost half their value as the tech sector collapsed. In the wake of those losses, funds' cash flows are well off last year's pace.
So far this year, U.S. stock funds have taken in just $41.7 billion, compared with more than $155 billion in the same period a year earlier. At the same time, flows to less racy bond funds are up, indicating an interest in lower risk investments or at least a persistent appetite for funds currently gaining ground.
Over the past year, the average stock fund is down more than 11%, while the average bond fund is up more than 7%, according to fund tracker
Lipper
.
Fund Junkie runs every Monday and Wednesday, as well as occasional dispatches. Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
ian.mcdonald@thestreet.com, but he cannot give specific financial advice.