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Equity Outflows Hit $8 Billion; Funds Lose $32B in February

As worries about the war with Iraq mounted in February, investors pour even more money into bond funds and took out even more from equity funds. All types of funds combined, the industry suffered $32 billion in net outflows in February, according to Lipper of New York.

Lipper expects equity fund flows to take some time to turn positive in 2003, even after stocks demonstrate an upward trend, and that's assuming a best-case scenario in Iraq. Regardless, Lipper expects the asset-management industry to continue to experience pressure on margins.

Last month, bond funds took in an estimated $19 billion, the most since August of last year, and third highest total on record. Meanwhile, equity outflows widened from January's pace of $1 billion to $8 billion.

No Inspiration

"February is normally a smaller-inflow month that January for seasonal reasons, and that pattern was clearly evident in our latest numbers," remarked Don Cassidy, senior research analyst with Lipper of New York. "With several sources of major worries reinforced in the daily news, few investors saw reason to be courageous and become the early buyers in hope of a rally in stocks soon."

The misery for equity funds is nothing new, as this area has only seen short-lived rallies temporarily driving inflows. In correlation, inflows into bond funds have been steady and are becoming more ingrained as time goes on. This mindset may take a while to reverse, even as a recovery in equities or a sustained rally takes place, according to Lipper.

In addition, money market funds saw outflows of $43 billion, for a net outflow of $32 billion for major fund types combined.

Very few domestic equity funds were in positive territory in terms of flows, while income funds were the largest gainer, taking in $1.8 billion.

Convertible securities funds added $300 million, while real estate funds gained half that amount. Special diversified equity funds, which include bear funds, added $250 million during the month. However, gold-oriented funds, S&P 500 Index-objective funds, and balanced funds, all which were expected to fare well, did not produce positive flows.

U.S. diversified funds saw $9 billion walk out the door, up from the $3.8 billion loss in January. This area has seen outflows in eight of the last nine months for a cumulative outflow of $83 billion. Within this category, Large-cap funds, a repeat offender, were again one of the main culprits, losing $6.5 billion in flows during the month. Large-caps have had outflows in 13 of the last 14 months.

Sector equity funds, with less than $115 in assets, lost $1 billion, wider than the $700 million outflow they experienced in the previous month. World equity funds produced inflows of $1.4 billion, but that wasn't enough to keep net flows in major equity fund types from dropping $8 billion.

Reaching for Yield

Government bonds, government-backed mortgage bond funds, as well as high-yield bond funds, took in $3.2 billion, up significantly from the $1.4 billion in January.

Lipper concludes that since the positive movement of high-yield funds usually directly correlates with the demand for stocks and equity funds, and the two sides moved in opposite directions in February, investors must have been reaching for yield.

Treasury bond funds also are gaining fanfare, as they brought in $1.1 billion, or about 6% of existing assets, during February.

In the fixed-income bond fund category, $10.8 billion came from taxable short and intermediate fixed income funds. Those of the municipal variety gained $1.5 billion for a total of $12.3 billion in inflows. Taxable long-term bond funds grew by $6.7 billion, while municipals remained unchanged.

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