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Investors Yank $5.8 Billion Out of Stock Mutual Funds


Although equity mutual fund panic selling abated in August, thanks to a sideways market, and investors continued to flock to bond funds, sharp withdrawals from money market funds netted the industry a $23.3 billion overall loss of assets last month, Lipper revealed last week.

Investors withdrew $5.8 billion from stock funds in August and $36.9 billion from money market funds. Only bond funds fared well, with investors plowing $19.4 billion into these instruments in the month, Lipper data showed.

Double Dip?

While the net outflows from equity funds was markedly lower than the record $53 billion that investors withdrew in July [see MFMN 9/2/02], Donald Cassidy, senior research analyst at Lipper, called the outflows "worrisome, given that the stock market was up slightly."

Cassidy said he was concerned that "the market's slow, broad-based meltdown" might be pushing investor confidence to "a new low, just as it was in 1988 by the Black Monday crash.

In fact, August was the first month since December 1988 when the S&P 500 rose but investors pulled money out of equity funds, according to Lipper.

Other developments Lipper found that were of note were a dwindling interest in value and small-cap funds, with multi-cap funds gaining interest. Since small-cap and value funds traditionally lead in an improving economy, Lipper analysts attributed investors' sudden fickleness towards these sectors to renewed fears of a double-dip recession.

Bonds continued their popularity, although not as strongly as in July, when they set a record for $19.2 billion net purchases. Last month, investors increased their bond fund holdings by $19.4 billion, according to Lipper.

As to the $36.9 billion that investors took out of money market funds, Lipper attributed this movement to the widening spread between the yields on such funds and relatively attractive bank CDs [see MFMN 9/9/02].

Trouble Up Ahead

Anticipating mutual fund flows in the months ahead, Lipper analysts said it is possible that investors may begin reallocating money in their 401(k) plans out of stock funds [see MFMN 9/23/02].

"A 28-month bear market that destroyed an estimated $7 trillion of net worth has damaged both confidence and personal balance sheets, making an early return to ardent equity-fund buying an unlikely scenario," Lipper said in a release.

Furthermore, Lipper expects that the popularity of bond funds will continue and that investors will cash in equity funds to realize any gains with any upward market movement in the months ahead.