Stock funds are in this nasty phase: They keep losing money, and investors are voting with their feet.
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Investors Keep Yanking Money Out of Stock Funds
Fund investors redeemed $9.7 billion more than they invested in sagging stock funds in the five trading days ending last Thursday, according to preliminary estimates liquidity-tracker
released on Sunday. Instead of stock funds, investors opted for the security of money market or cash accounts, which garnered more than $14 billion last week, by TrimTabs.com's tally.
Preliminary flow estimates can change, but these outflows from stock funds are part of a continuing trend. Cash flows to stock funds have trailed off with the funds' lousy performance over the last 12 months, and February was stock funds' first outflow month in two years. TrimTabs.com estimates that redemptions have outpaced investments in stock funds by $21.6 billion over the last two weeks. For comparison, stock funds averaged weekly inflows of nearly $6 billion last year.
When compared with flow figures from just a year ago, this trend illustrates a sharp shift in investor sentiment. Fund investors often stockpile cash early in the year to pay their tax bills, but in the first 12 weeks of last year stock funds were in the black to the tune of nearly $110 billion. In the first 12 weeks of this year, they're in the red by more than $5 billion. At the same time, flows to bond and money market funds, compared to last year, are markedly higher.
Reversal of Fortune -- Literally
Source: TrimTabs.com. Figures through March 22.
Cash flows to mutual funds are always closely watched as a barometer of investor sentiment and in the up-is-down world of Wall Street, sagging fund flows can sometimes presage an exhaustion of negativity with sunnier days ahead. That said, steep outflows could also be a drag on the market as fund managers are forced to sell stock to cash out departing investors. In recent weeks, we've looked at
how sizable and consistent outflows from ravaged tech and tech-heavy funds could be the sucker punch that already battered tech stocks don't need.
The main causes of the outflows are sagging returns and steeper-than-usual tax bills.
Last year's top-selling tech funds and tech-stuffed growth funds, which rocketed up in 1998 and 1999, have come crashing to earth with the
, where slackening economic and earnings growth have crushed frothy valuations.
The average big-, mid- and small-cap growth funds, many of which had half their money sunk into the now-sagging sector, have lost more than a third of their value over the last 12 months. And the average tech fund, which gobbled up some 30 cents of every dollar invested in U.S. stock funds last year, is off more than 60% since this time last year.
Source: Morningstar. Returns through March 22.
Beyond bleak performance, fund investors' smaller appetite for stock funds is probably driven by their need to raise cash for tax bills that are higher than usual. The reason: Last year mutual funds paid out a record $345 billion in taxable capital gains, pulverizing the record they set a year earlier when they paid out $238 billion.
While these steep tax bills and losses could continue triggering redemptions for some time, there's reason to think it will take time for them to rattle the market. TrimTabs.com notes that stock funds have some $200 billion in cash on hand, which will be a cushion for at least some time.
Fund Junkie runs every Monday, Wednesday and Friday, 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
firstname.lastname@example.org, but he cannot give specific financial advice.