Stock Fund Cash Inflows Tail Off as Market Slides

Wall Street’s woes apparently reached the tipping point for many stock mutual fund investors in November, resulting in the lowest net cash inflow to the funds in nearly two years.

At the same time, stock fund managers continued to build up their cash reserves, boosting the average fund’s cash holdings to 6.5% of assets, up from 6% in October and the highest since late 1997.

Both trends appear to be continuing in December. Yet some analysts argue that the shifts are potentially bullish, because they point to more dollars on the sidelines that could eventually fuel a rally--though when exactly that might happen is anyone’s guess.

Stock funds took in $8.8 billion in net new cash in November, down from $19.2 billion in October and the lowest since a $767-million net inflow in February 1999, the Investment Company Institute said Wednesday. Net new cash flow is new purchases minus redemptions.

ICI, the chief trade group for the fund industry, said its data showed a drop in cash flowing to aggressive growth funds in November. Those funds are among the biggest holders of technology stocks.

Meanwhile, more conservative growth-and-income funds saw inflows rise.

Many fund investors, however, chose to make the most conservative bet of all last month: They pumped a net $56.2 billion into money market funds, up from $26 billion in October.

November’s trends appear to be holding up at many fund companies this month. At Vanguard Group, investors have put about $543-million net into stock funds so far in December, down sharply from $1.2 billion in November, a Vanguard spokesman said.

Fidelity Investments said investors are favoring money market funds and bond funds, while stock funds are seeing only a small inflow. T. Rowe Price said December has been “kind of flat.”

Beyond concerns about the stock market’s continuing slide over the last two months, many investors have another reason to hold off purchasing stock funds at this time of year: This is when the funds usually make annual capital gains payments. Buying a fund before such payments are issued means buying an instant tax liability, unless the fund is in a tax-sheltered account.

Still, November’s net stock fund inflow was well below the $18.5 billion of November 1999.

Even as the tech stock sector began its latest slump in September and October, many investors continued to push cash into aggressive-growth funds, evidently hoping they were buying near the stocks’ lows. In October aggressive-growth funds took in $7.16 billion in net new cash, up from $5.91 billion in September, ICI said.

But in November the net inflow to that fund sector slid to $5.06 billion, as tech shares plunged again. At the same time, the net inflow to growth-and-income funds jumped to $1.69 billion in November as investors grew more conservative. Those funds had a net outflow of $262 million in October.

Bond funds, which have outperformed most stock funds this year, still aren’t attracting loads of money, however. Taxable bond funds had a net outflow of $673 million in November, as investors pulled out of the stumbling junk bond sector.

Municipal bond funds, which have performed extremely well this year, had a net inflow of just $34 million in November.

For stock funds, analysts note that the decline in November inflows looks significant compared with the record sums investors threw at the funds early in the year, when tech-heavy funds were attracting huge interest.

Even so, the fact that inflows continue at all in such a weak market says that many fund investors have great confidence in stocks long-term, some say.

Carl Wittnebert, research director at TrimTabs.com Investment Research Inc., estimates that stock funds will take in about $10.5 billion in net new cash this month.

“By the standards of the year 2000 [December is] pretty crummy,” he said. “By any other standards that’s outstanding.”

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STOCKS GAIN

Blue chips rallied for a fourth session, and Nasdaq also advanced. C4

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Back to Earth

Stock mutual funds had a net cash inflow of $8.8 billion in November, the smallest since February 1999, as investors held back.

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November: $8.8 billion

Source: Investment Company Institute