Mutual Fund Fans Favor Blue Chips Over Small Stocks

Investors are steering away from high-risk stock mutual funds in favor of more conservative stock funds--a shift that could mean new trouble for battered small stocks.

Through April, the high-risk funds had reigned supreme: In the first four months of the year, growth and aggressive-growth stock funds, which tend to focus on smaller and/or riskier stocks, attracted a stunning $26.02 billion in new investment from individuals.

Meanwhile, the two major categories of conservative stock funds--growth-and-income funds and equity-income funds--were a distant second, luring $20.66 billion in new cash between January and April.

Those numbers come from the funds’ trade group, the Investment Company Institute, which on Thursday reported April sales figures. Though the report showed that the funds’ total sales of stock and bond funds remained healthy in April at $29.9 billion (down just slightly from $30.4 billion in March), the one-month lag in reporting tells nothing about the latest fund trends.

Interviews with individual mutual fund companies, however, suggest big changes afoot in recent weeks. Many are reporting a surge in purchases of conservative funds and a significant drop in purchases of riskier funds:

* Boston-based Fidelity Investments, the nation’s largest fund company, says its aggressive stock funds have accounted for less than 10% of net stock fund inflows this month, down from more than 50% in February. Meanwhile, the firm’s growth-and-income and balanced (combination stock and bond) funds have accounted for more than 70% of May’s net stock fund purchases, says Roger Servison, head of Fidelity Retail Services.

* At Financial-Invesco funds in Denver, “the conservative funds are definitely winning out now,� spokeswoman Laura Parsons says. The company’s Health Sciences fund--loaded with many small medical stocks--was one of the hottest funds of 1991. Now buyers are favoring the blue chip Industrial Income fund, Parsons says.

* Net purchases of shares in Boston-based Massachusetts Financial Services’ small-stock Emerging Growth fund this month have been running at half the pace of January and February, spokesman John Reilly says.

Why the change of heart? Some investors appear shaken by the dismal performance of the small-stock market this year. The NASDAQ composite index of more than 4,000 small stocks reached its zenith at 644.92 early in February, and now stands at 580.49, down 10% from the peak.

In contrast, the blue chip stocks owned by more conservative funds have fared much better. The best known blue chip index, the Dow Jones industrial average, hit another high Thursday, up 27.99 points to 3,398.43. And the broadest blue chip index, the Standard & Poor’s 500, is down just 1% from its January peak.

Last year, small stocks were the market’s stars, as the NASDAQ index leaped 56.8%, versus the S&P; index’s 26.3% gain. Many investors poured into aggressive stock funds early this year largely because they expected a repeat of 1991.

But as the small-stock market has failed to revive with each passing month, investors’ desire to throw money that way has faded.

That could cause more problems for small stocks in the short term: Because mutual funds now are the dominant buyers of stock (over pension funds), a decline in cash flows into small-stock funds could continue to undermine demand for those shares, leading to even lower prices.

Of course, “contrarian� market analysts who believe that the crowd is always wrong may see evaporating enthusiasm for small-stock funds as a buy signal. It’s true, after all, that individuals favored blue chip funds over aggressive funds in the first four months of 1991--which was exactly the period in which they should have been buying small stocks, as they rocketed.

However, Fidelity’s Servison says the shift in investor sentiment away from small stocks may so far be occurring only at funds that sell direct to the public, such as Fidelity--rather than at broker-sold funds, which still dominate the field.

In other words, investors who make their own decisions appear to have chosen as early as March to turn to the strengthening blue chip stocks. That’s what Fidelity’s sales show, at least.

Because the fund industry’s April results show that there still was significant demand overall for aggressive stock funds, it may be that stockbrokers in April continued to push their small-stock funds to clients, even as independent investors went for blue chips. “The brokers tend to push yesterday’s story,� Servison notes.

If that’s the case, and blue chip stocks continue to gain ground at the expense of small stocks in the months ahead, the brokers will at some point join the chorus favoring the blue chips--potentially leading to a broader decline in small-stock fund sales, and thus more weakness in those stocks.

Are Investors Turning More Conservative?

From January through April of this year, purchases of growth and aggressive-growth stock mutual funds far exceeded purchases of more conservative stock funds. But some companies say the tide turned in May.

Total purchases of stock fund shares, by category (January through April, in billions)

1991:Aggressive growth and growth: $11.67 Conservative growth: $12.21 1992:Aggressive growth and growth: $26.02 Conservative growth: $20.66 Note: Conservative funds are growth-and-income and equity-income funds.

Source: Investment Company Institute