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Reports of Equity Funds' January Demise Greatly Exaggerated

Early estimates of January's equity fund flows turned out to be way off. Stock funds experienced net flows of nearly $20 billion, the Investment Company Institute reported. Lipper's estimate of $3 billion in flows indicated that it was the worst January in terms of equity inflow since 1991 (See MFMN 2/25/02).

There are two reasons for the inaccurate estimate, said Donald Cassidy, senior fund analyst at Lipper. The first is that Lipper arrives at its estimates by comparing the end of the month assets with those of the previous month, factoring in performance. That can prove to be an inaccurate method when firms report distributions, which typically happens in January. Some funds report assets as if the distribution has been taken out while others report assets as if the distribution has been reinvested, according to Cassidy.

The other factor that could distort Lipper estimates is a great deal of market volatility in the middle of the month, Cassidy said. The firm's estimates are generally much more accurate when the equity market is somewhat steady. This month's inaccuracy was due to a combination of both factors, Cassidy said.

Most of January's equity flows came from domestic funds, which had net flows of $16.2 billion. International equity funds had an inflow of $3.4 billion compared to an outflow of just over $4 billion in December.

Lipper's estimate of $9.4 billion in fixed-income fund flows was much more accurate. According to the ICI, $10.6 billion flowed into bond funds in January. That is after an outflow of $1.89 billion in December.

Money market funds saw a huge turnaround in January. After an outflow of $25.41 billion in December, money market funds had net flows of $13.99 billion. The increase is due to institutional money funds, which had inflows of $20.85 billion, according to the ICI. Retail money funds had an outflow of $6.86 billion.