Net Outflow for Stock Funds; Record Take for Bonds

Wearied by the long bear market, investors last year pulled more money from stock mutual funds than they put in -- the first annual cash outflow in 14 years, the industry’s chief trade group said Thursday.

But what was bad for stocks was very good for bonds: Mutual funds that own fixed-income securities took in a record sum as investors looked for a safer bet than equities, and as some people simply chased after what has been the better-performing asset class since 2000.

Stock funds had a net cash outflow of $7.8 billion in December, which brought the 2002 total net outflow to $27.1 billion, the Investment Company Institute reported.

It was the first calendar-year cash outflow since 1988, when stock funds saw a net $16.1-billion exit in the aftermath of the October 1987 market crash.

Fund cash flows measure the total of new investment less the amount redeemed.

Investors’ gross new purchases of stock fund shares totaled $900 billion last year, down a modest 5.5% from 2001, which suggested that many investors continue to invest regularly in equity funds, such as through employer-sponsored retirement accounts.

The combination of the decline in new purchases and a slight rise in redemptions, which were up 1% from 2001 to $927 billion, produced the negative cash flow number for the year.

As a percentage of the $2.7 trillion in stock fund assets the 2002 outflow was minuscule, at 0.9%. Still, it may have contributed to Wall Street’s third straight losing year, as some fund managers may have been forced to liquidate securities to meet redemption calls.

While investors’ appetite for stock funds waned, bond funds took in a net $140.5 billion last year, the biggest annual inflow on record. The previous record was $103 billion in 1986.

In December bond funds, including government, corporate and municipal securities portfolios, had a net inflow of $7.4 billion, the institute said.

Funds that own high-quality bonds have produced positive returns for three years. They’ve been helped as falling market interest rates have boosted the principal values of older, higher-yielding bonds in fund portfolios.

But if the economy rebounds this year, and market interest rates rise, analysts warn that bond fund returns could turn negative because falling principal values could offset interest earnings.