Net New Investments in Mutual Funds Are Down

Net new investments into mutual funds are down significantly this year, in what may be the first hard evidence that individuals are increasingly moving money into individual stocks instead of funds.

Despite rising consumer confidence and surging stock prices, net new investments into stock funds fell 50% in the first quarter of 1999 from a year ago, according to figures released Thursday by the Investment Company Institute, the fund industry’s chief trade group.

And although stock fund “inflows” seem to be picking up in April, it appears that most of this new money is going to only a handful of the most popular funds and fund companies.

Given the first-quarter statistics, a logical assumption would be that investors turned to bond or money market funds instead, but that wasn’t the case. Net new investments into all mutual funds--stock, bond and money market--were down 23% during the quarter, from the first quarter of 1998, according to the ICI.

“My guess is people are taking some of that money and investing it directly into stocks,” says Chris Brown, a fund analyst at Financial Research Corp., a financial services consulting firm in Boston.

A. Michael Lipper, president of Lipper Analytical, a leading mutual fund tracking firm, believes rising consumer spending could also be to blame. But “certainly, some of the money has been sucked into individual Internet securities,” he says.

There are two strong forces tugging at money that would have otherwise gone into stock mutual funds, says Avi Nachmany, analyst at fund-research firm Strategic Insight in New York.

First, there’s the “speculative bubble,” as he calls it, that is luring investors to try their hands at investing in individual Internet stocks. “Money goes into everything.com,” he says.

The other is what he describes as “an exaggerated sense of anxiety,” which is driving some investors on the opposite end of the risk-tolerance spectrum to avoid the stock market altogether.

“You have this intense pull between these two forces,” Nachmany says. And until one or both go away, fund flows into equity funds aren’t likely to return to early 1998 levels, when investors were pouring $20 billion into stock funds every month.

In March, Americans invested a net $12.7 billion into stock funds, according to the ICI, well below the $22.4 billion for March 1998.

Moreover, March marked the eighth consecutive month the industry saw disappointing fund flow.

Once again, as in February, investors yanked more money out of international stock funds than they put in during the month. Similarly, “aggressive growth” funds, which would include small-company stock funds, also recorded net redemptions in March.

At the same time, taxable bond funds saw net inflows of $4.8 billion in March, down from $5.5 billion from the same month last year.

Even if investors pump more than $22 billion into stock funds this month--which the Santa Rosa-based research firm Trimtabs.com projects--stock fund inflows for the first four months of this year would still be off more than 40% from the same period last year.

However, the nation’s largest mutual fund firms--including Fidelity, Vanguard Group, Janus, Schwab, T. Rowe Price and Invesco--are reporting large amounts of new money this month. Many smaller fund companies, though, are still finding new money hard to come by, according to Financial Research Corp.

And Trimtabs, which tracks 421 mutual funds, reports that on an average day this month, less than half were experiencing net inflows.

Meanwhile, in recent weeks, fund companies began noting a rising interest in out-of-favor small-company and international-stock funds.

But Carl Wittnebert, Trimtabs’ director of research, said there are signs that much of the money going into these once-overlooked funds is “timer” money--that is, from aggressive traders trying to capitalize on short-term market movements.

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Souring on Funds

Net new cash inflows into stock and bond mutual funds dropped sharply in the first quarter, despite strong markets. Net inflows, in billions of dollars:

Stock funds

First quarter 1998: $60.6

First quarter 1999: $30.6

*

Bond funds*

First quarter 1998: $28.2

First quarter 1999: $17.8

* Includes hybrid (balanced) funds, taxable and tax-free bond funds

Source: Investment Company Institute