After a volatile and painful year, investors just aren't buying shares of stock mutual funds like they used to.
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That's the story that continues to unfold, most recently in mutual fund cash-flow estimates released by liquidity tracker
on Sunday night. Redemptions from funds outpaced investments in the first four days of last week, but a decent in-flow on Friday led to positive cash flows to stock funds.
Still, investments in stock funds are well down from 1999 and 2000, when a frothy, tech-led bull market buoyed many fund investors' returns and confidence. No doubt this is due to the pain felt on Wall Street as the
have fallen 17% and 50%, respectively, over the past 12 months.
While investors might not be yanking money from stock funds at a frantic pace so far this year, they aren't rushing to buy shares, and the confidence of some is clearly shaken. The situation underscores the endurance of some investors' instinct to chase performance rather than follow a vanilla diversified strategy, investing the same amount each month in good times and bad. It seems some investors won't buy shares of a stock fund until a sustained rally pushes prices up, potentially whittling their long-term returns.
"There is no question that the propensity to invest has diminished over the year. That is a given since individuals invest more if the market goes up and less if it goes down," writes TrimTabs.com President Charles Biderman in Sunday's report.
Thanks to Friday's windfall on the heels of Tuesday's and Wednesday's stock gains, investments into U.S. and foreign stock funds for the week outpaced redemptions by $3.2 billion and $1 billion, respectively, according to TrimTabs.com's tally. At the same time, cash flows to bond, balanced and money-market funds turned negative. High-yield bond funds, last among all bond fund groups with a 5.4% loss over the past 12 months, have lost a stunning $2 billion, or 2%, of their assets in just the past 10 days.
While last week's positive flows to stock funds might seem like good news, it's still under last year's weekly average.
For a more stark illustration of investors' battered confidence, compare cash flow figures so far this year with the same period last year. At this point in 2000, domestic stock funds took in some $167 billion more than they lost to redemptions, compared to just $45.4 billion this year. At the same time, flows to less racy fare like bond and money market funds, which were in net outflows last year, are in the black so far in 2001.
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 even 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.
If there's any constant, it's that at least some fund investors won't buy shares of a stock fund until they think they have a more reasonable chance to earn money in the short term. While the reflex is understandable, waiting to invest until you're brimming with confidence -- rather than investing a set amount each month -- can be costly because you're usually most confident near a market top.
Consider that a hypothetical $10,000 investment in the sizzling (and closed)
Janus Twenty fund at the end of 1999 when it gained 65% and trounced its peers would've been worth $5,739.25 at the start of this month, according to
No matter how troubling the pattern may seem, performance-chasing is clearly happening this year. Each month in 2001, cash flows to funds have risen and fallen in erratic cycles tracking the Nasdaq Composite pretty closely. June's cash flows are fairly high given that both the S&P 500 and Nasdaq are underwater so far this month, but that could change before the month's books close this Friday.
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
email@example.com, but he cannot give specific financial advice.