Stock Funds Take in More Cash in June, but Not at Last Year's Levels
Fund investors' confidence in the stock market is on the rise but still below last year's fervor, judging from an early fund-flow tally for June.
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In the first week of June, investments into stock funds outpaced redemptions by $3.9 billion, according to preliminary estimates released Monday by liquidity tracker
TrimTabs.com
. True to form, this modest in-flow mirrors small gains for the
S&P 500
and
Nasdaq Composite
-- up 0.7% and 5%, respectively -- so far this month. If this trend continues, June will be stock-funds' third-consecutive month of net in-flows. But a little perspective shows that investors' confidence will only last if stock prices keep heading north and that their affection for stocks is starkly below 2000 levels.
The preliminary data show that fund investors burned by the Nasdaq's collapse last year -- when the tech-heavy benchmark fell nearly 40%-- are far less excited about owning stock funds.
Though stock, bond and money market funds all had positive in-flows in June's first week, only bond and money market funds' cash flows are ahead of last year's weekly in-flows. U.S. and foreign funds raked in a combined $3.9 billion more than they lost to redemptions last week, but that's well off the two categories' $5.9 billion average weekly in-flow last year.
Cash flows to mutual funds are closely watched as a barometer of investor sentiment, and they can give dry powder to both bulls and bears. For instance, optimists might make the logical argument that rising in-flows are a positive sign for the market because fund managers putting that cash to work in the market would help boost stock prices.
But last year a record $309 billion flowed into stock funds, according to the
Investment Company Institute
, the fund industry's largest trade group, and that didn't keep the S&P 500 and the Nasdaq from losing 9% and 39%, respectively. In fact, in the up-is-down world of Wall Street, pessimists can read high in-flows as a sign that stocks have hit a near-term high.
Fund flows tend to follow stock performance and that's been the case this year. If we compare stock-fund flows with stock performance, we find that investors are reluctant to write checks to fund companies when it's raining on Wall Street. In March, for instance, redemptions from stock funds outpaced investments by a record $20.6 billion when the Nasdaq followed up February's 24.2% tumble with a 16.6% fall. But when the Nasdaq gained 15% in April, a whopping $25 billion gushed into stock funds.
While understandable -- particularly since many investors rode the sizzling tech sector to significant losses over the past year -- the performance-chasing reflex can ensure that investors are buying high and selling low.
There might be no more stark illustration of investors' shaken confidence than a comparison of fund flows so far this year against the same period in 2000. So far this year U.S. stock funds are in the black by just $41.4 billion, compared to $151.7 billion last year. At the same time, bond funds, which were in net out-flows by more than $50 billion at this point last year, are in the black by more than $35 billion.
The reason: The average U.S. stock fund is down 6.6% over the past year, compared with a 7.8% gain for the average U.S. bond fund, according to
Lipper
. It's hard to imagine fund investors will lose their taste for less racy fare like bond funds until stock funds start to look less green around the gills.
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
imcdonald@thestreet.com, but he cannot give specific financial advice.