Flows Into Stock Funds Decline in December as Investors Hold Back

Stock mutual fund investors have sharply slowed their fund purchases this month, at a time when the funds’ cash reserves have dropped to fresh 20-year lows, according to figures reported Monday.

While the data raise new concerns about the bull market’s health--because the funds have been a critical source of demand for stocks--some analysts say the slowdown in cash inflows is merely seasonal and could be followed by an explosion of buying in January.

On Monday, the Investment Company Institute, the funds’ trade group, said stock funds took in net new cash of $17.1 billion in November, up 26% from October’s inflow.

But Trim Tabs Financial Services of Santa Rosa, Calif., one of several independent services that track fund trends on a more current basis, estimated that December inflows into stock funds will total just $11.1 billion, down 35% from November and the lowest since July.

Many mutual fund companies confirmed that fund purchases have slowed sharply this month. Vanguard Group said its stock funds have taken in $1 billion in December, down a third from November’s take.

The drop-off in purchases may be leaving many portfolio managers with very little cash with which to buy stock: The ICI also reported Monday that the average stock fund had just 5.8% of assets in cash reserves at the end of November, down from 6.4% in October and the lowest since the 5.3% reading of January 1977.

With such minuscule reserves, fund managers could be forced to dump stock into the market to raise cash if fund investors were suddenly to begin redeeming shares. That could rapidly exacerbate any market decline.

But many analysts say the more likely scenario is that individual investors will begin shoveling huge new sums of cash into stock funds with the dawn of the new year.

John Woerth, a spokesman for Vanguard Group, said the company wasn’t surprised that fund purchases trailed off this month. He noted that Vanguard, among other fund companies, advised investors to hold off buying in December for tax reasons.

Most stock funds pay out annual capital gains in December, and buying fund shares before the payout means investors incur an immediate tax liability. Therefore, it makes more sense to wait to buy in January, after the payouts are made.

Fidelity Investments, which estimated that its domestic stock funds will show little if any net inflow this month after a $1-billion inflow in November, also cited in part investors’ awareness of capital gains payments.

But some fund companies also said the stock market’s sudden downdraft in early December--after Federal Reserve Board Chairman Alan Greenspan raised the question of possible “irrational exuberance� in financial markets--may have scared off some investors.

“We’re down quite a bit from last month because of market volatility,� said Rowena Itchon, a spokeswoman at T. Rowe Price Associates Inc.

The funds now are pinning their hopes on a replay of the first few months of 1996: Stock fund inflows rocketed from $16.4 billion in December 1995 to $28.9 billion in January 1996 and remained above $20 billion each month through May, helping to power the U.S. stock market in the first half of this year.

January traditionally sees heavy fund inflows, as companies make new payments to employee retirement plans and as investors plot new courses for the year.

Whatever total flows into stock funds this month, 1996 is already in the history books: A record $209.8 billion in net new cash flowed into the funds in the first 11 months of this year, far eclipsing the previous full-year record of $129.6 billion set in 1995. Net new cash flow measures fund purchases less redemptions and reinvested dividends and is adjusted for exchanges among funds in the same families.

Meanwhile, the ICI also reported Monday that bond funds had net new cash flow of $1.34 billion in November, contrasted with a net outflow of $430 million in October.

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Stock Fund Inflows

Net new cash flow into stock mutual funds, monthly totals, in billions of dollars:

Nov. 1996: $17.1

Source: Investment Company Institute