Nasdaq in ‘Correction’ as Tech Shares Slump Again

Americans pumped a record-shattering $53.6 billion of net new money into stock mutual funds in February. And many investors may now be wondering if they got in just in time for a market peak.

The huge inflow of cash blew past the previous record of $40.9 billion set just one month earlier, the funds’ chief trade group, the Investment Company Institute, reported Thursday. And just as in January, fund buyers in February were mainly targeting the hottest sectors of the market.

About three-quarters of the February inflow went into growth-oriented mutual funds and technology sector funds, according to Boston-based Financial Research Corp. Major fund companies, including Fidelity Investments, Invesco and fund supermarket Charles Schwab, say money has continued to cascade into those types of aggressive funds in March as well.

Yet since March 10, the tech-dominated Nasdaq composite index has slumped into an official correction, losing nearly 12% of its value, including Thursday’s dive.

Now, some experts are wondering how quickly recent fund buyers may flee tech funds and other high-octane portfolios.

“My guess is, it’ll turn fast,” said Bill Dougherty, a mutual fund analyst with the consulting firm Kanon Block Carre in Boston. “There used to be a lag; after performance died, [purchases] would continue for a while. But that’s no longer the case. There’s too much press coverage. And too much ‘hot’ money.”

Cash flows into stock mutual funds typically are strong in the early part of the year, reflecting contributions to retirement plans and the deployment of year-end bonuses into investments.

But the magnitude of the inflows so far this year has stunned many experts.

Avi Nachmany, analyst at fund-research firm Strategic Insight in New York, says equity funds are on track to bring in nearly $150 billion of net new money during the first quarter--which would set yet another record.

“What’s shocking is that you’re doing this without the participation of the ‘value’ fund business,” he said.

Indeed, conservative, value-oriented funds still are bleeding assets. According to ICI figures, traditional “growth and income” and “equity-income” funds--which are often associated with value-oriented investing--suffered $14.3 billion in net redemptions in February, marking the fourth consecutive month of net outflows for these funds.

Fund-tracker Trimtabs.com estimates that these funds have suffered more outflows in March.

Besides being concentrated in what were the hottest “momentum” segments of the stock market in the first quarter, the record net cash inflows to stock funds overall are concentrated among a minority of fund companies.

For every five fund firms experiencing net inflows this year, eight are in net redemptions, Trimtabs estimates.

As for the winners in February, they were the usual suspects. Denver-based Janus, with its aggressive investing style, led the industry, raking in more than $10 billion of net new cash.

Boston-based Putnam Investments and Denver-based Invesco each pulled in more than $2 billion, with fund giants Vanguard Group and Fidelity close behind.

The biggest surprise in the February fund data was the amount of new money--$18 billion, up nearly 50% from January--that went into foreign stock funds.

Many foreign stock markets have been strong when measured in their native currencies this year. But net returns to U.S. investors in foreign funds have been held back by the strong dollar.

Analysts say many investors adding to foreign funds in February may still have been looking back to the hot returns the foreign sector produced in 1999, and hoping for more of the same.

What’s the source of the cash avalanche that has flowed into stock funds this year?

For one thing, money is still exiting bond mutual funds. Taxable and municipal bond funds lost nearly $8 billion to net redemptions in February, ICI data show. Government bond funds saw $2.9 billion in outflows.

More significant, net inflows into money-market mutual funds have slowed sharply versus a year ago--another sign that many investors have stopped playing it safe in favor of more aggressive investments.

For the first two months of this year, net inflows to money funds were $56.6 billion, down from $82 billion a year earlier.

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Avalanche of Cash

Investors poured a record $53.6 billion in net new money into stock mutual funds in February, with most of it going into funds that focused on hot growth stocks. Monthly net inflows (gross purchases less redemptions), in billions:

Source: Investment Company Institute