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Funds Ooze Billions in Outflows

Funds with 10-digit outflows quadruple in first half of 1999.

As any trauma unit doc will tell you, it's hard to stay healthy when you're hemorrhaging. Well, pass the gauze: There are a good number of mutual funds this year that could use it.

Eighteen mutual funds had net outflows of more than $1 billion in the first half of 1999, according to

Financial Research

. That's a big uptick from last year, when only four mutual funds saw a 10-digit loss of assets during the first half.

The heaviest bleeder was the

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Merrill Lynch Global Allocation fund, which lost $2.9 billion in the first six months of 1999, according to Financial Research.



MAS Value fund lost the most in percentage terms, as net outflows equaled 53% of its remaining assets by the end of June.

While such large outflows can sully a manager's reputation, they also spill over into problems for investors, namely surprise capital-gains taxes and short-seller attacks on other fund holdings.

Managers are put in a pinch to cover massive redemptions by selling stock. For the remaining investors in those mutual funds, this can mean larger realized capital gains on quick exits from profitable positions. If a manager is forced to sell to meet redemptions, these realized gains can accumulate to be a nauseating side effect.

Because these gains are distributed evenly to existing shareholders, investors who stick with a fund can get saddled with even bigger capital gains as their peers flee, because the pool of people to distribute the gains to becomes smaller. Notes one manager: "You never want to be the last one out the door, no matter what kind of fund it is."

No matter who gets out first, redemptions can be like blood in the water, attracting short-sellers who pounce once a fund gets a reputation for selling out to meet redemptions.

When the performance of Ron Baron's

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Baron Asset fund lagged, it attracted

short-selling talk about the fund's positions in relatively illiquid names like

Vail Resorts

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Polo Ralph Lauren

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Sotheby's Holdings

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. The fund has recovered somewhat this year, however, and posted a 9.7% return year to date.

Thankfully for fund holders, capitalizing is harder than it looks. "Not that you still couldn't make a lot of money doing it," says Erick Remole, manager of the


Warburg Pincus Long-Short Equity fund. "But the markets are very efficient at discounting information. It's hard to stay ahead."

Remole notes that it would be easier to short the portfolio of a small-cap fund (Baron's counts itself in this category). Notably, the

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Kaufmann fund, which also bills itself as a small-cap fund, has bled $1.1 billion in assets this year, a figure equal to a hefty 33% of its remaining June assets.

Robert Sanborn, manager of the large-cap value

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Oakmark fund, which suffered $1.9 billion in net outflows during the first half of the year, says he's been selling to meet redemptions. But he figures that the stocks in his fund -- which include

Philip Morris

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Lockheed Martin

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-- haven't been swayed too much by that selling.

Because value managers have been out of favor in recent years, Sanborn says a sort of daily purging has developed among value managers as they raise cash for fleeing investors. "Anyone who has a value orientation has seen outflows," Sanborn says. "Generally, the people that own the value stocks are generally selling the same stocks every day."

As for the effect on his stocks, Sanborn's more apt to put the devaluation of value names in recent years at the feet of investors chasing growth stocks. "In the last couple of years, the relative price movements of larger-cap growth stocks vs. the value stocks have been entirely driven by mindless cash flow," Sanborn said.

Some value managers might use a selling discipline that negates the effect on their stocks by selling stocks that other people are buying. This is the philosophy of Don Yacktman, whose

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Yacktman and

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Yacktman Focused funds saw swollen outflows last year while he battled his independent directors for control of the funds.

"Most value investors will tend to sell on strength and buy on weakness anyway," Yacktman says. "Usually they're not selling into a situation where they are putting needless pressure on a stock anyway. They're usually selling the ones that other people want to buy."

And Yacktman notes that selling stocks can actually help a fund rebound, if it holds onto the right ones. By selling off companies that have made their runs already, a manager facing redemptions increases the concentration of his future winners in a fund.

Either way, poorly performing funds that are losing money to redemptions tend to keep losing assets "unless something significant within the fund occurs, such as dramatic performance turnaround," says Financial Research analyst David Haywood.

A performance turnaround, however, hasn't helped Sanborn's fund. Net outflows started picking up again in June despite the fund's 6.9% returns year to date compared to the 3.7% return he posted for all of 1998. Same goes for the


Vanguard Windsor fund, which, despite reopening to new investors and posting a 14.1% return year to date, still saw net outflows in June.

Sanborn says real flows won't start coming back to his fund until the archenemies of value investors -- Internet stocks -- lose their ability to bounce back. With Internet Sector

index down 35% since it April 12 high, he soon may get his wish.

Which means to stop the bleeding from funds like his, someone else is gonna get cut.