Many fund company executives are no doubt praying for leniency as they get ready to mail investors' first-quarter statements that tell a tale of woe. After all, fund shareholders are already dumping stock funds left and right.
Are February Fund Outflows the Start of Something Big and Bad?
Janus Redemptions Soar
No Redemption: Redemptions Could Weigh on Stocks
Investor redemptions from stock funds outpaced investments by $5.7 billion in the five trading days ending last Thursday, according to the latest data from liquidity tracker
. It's the third consecutive week of outflows by TrimTabs.com's tally and comes on the heels of a dreary February -- stock funds' first month of outflows in two years.
preliminary estimates can change, these figures do indicate a continuing trend with fund investors favoring less aggressive bond and money market funds over stock funds that have fallen hard over the past year.
Fund flows are always closely watched as a barometer of investor sentiment. Optimists might read this as a sign that the tumbling stock market is bottoming, but others will no doubt see it as the start of an ominous trend that could keep already ravaged tech stocks down.
The reason: If outflows persist for several months, fund managers selling stock to cash out rattled shareholders can add a terminal dose of selling pressure to already battered stocks. This can trigger a vicious cycle where sagging performance begets outflows, begetting even worse performance and further outflows.
This pattern crushed value funds in 1998 and 1999 when their style fell from favor. February's data indicated that tech- and tech-heavy growth funds, the top-selling fund categories in recent years, accounted for much of that month's outflows. If these outflows persist they could weigh on the tech-laden
Nasdaq Composite Index
, already down more than 60% over the last year according to
To be sure, a comparison of this year's fund flows with last year's highlights an about-face. So far this year stock funds are eking out weekly average inflows of $200 million, compared to $5.9 billion last year. At the same time cash flows to bond and balanced funds have gone from negative to positive, while investors are more interested in the safe haven of money market or cash funds.
Some might blame the outflow patterns on fund investors seasonal stockpiling of cash to pay their tax bills. After all, those bills are higher this year, thanks to record taxable capital-gains distributions last year.
But that doesn't really hold water if we compare flow figures from the first 13 weeks of this year with the same period in 2000. So far this year stock funds have netted just $2.5 billion, compared with $113.8 billion in the same amount of time last year. At the same time, cash flows to bond funds and balanced funds, which own both stocks and bonds, are much higher. Money markets are taking in more money, too.
A more plausible excuse for the sagging flows to stock funds are the steep losses suffered by growth funds that loaded up on tech in 1999, soaring to outsize returns and record in-flows. Big-, mid- and small-cap funds have all lost more than a third of their value over the past year, according to Morningstar. The
Vanguard 500 Index fund, which tracks the
S&P 500 Index
, is down some 12% over the same period.
Tech- and communications-sector funds have been hit even harder than their diversified counterparts. On average, both categories, which more than tripled the S&P 500 in 1999, have lost more than half their value over the past 12 months. Money has only started to gush out of tech funds, which saw February net outflows of $1.5 billion, but it's hard to imagine they won't pick up. The mercurial funds took in some 30 cents over every dollar invested in U.S. stock funds last year and those recent investors are well in the red.
To lesser degrees, the same argument could be made for rising outflows from growth funds, as fund investors nationwide await their disappointing first-quarter account statements.
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.