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Despite Scandal, October Sees Rise in Fund Inflows


Even with the probes and charges of New York, Massachusetts and federal regulators widening to unprecedented lengths, stock funds netted $23.8 billion in October, according to Lipper's month-end analysis.

It marked the seventh straight month that equity funds experienced inflows, and the nearly $24 billion lagged behind only August 2003 as the highest-netting month this year.

The news came as several top-shelf fund companies experienced shakeups and admitted fault stemming from illegal and improper trading.

"While some of the fund brands named suffered outflows, the discouraging news of wrongdoing did not send fund investors to the sidelines by any means," said Donald Cassidy, a senior analyst at Lipper. However, Cassidy did mention some factors that may keep November from being as effective.

"Although investor confidence in funds seemed quite robust in October, we believe November will prove to be more challenging in light of the added recent disclosures and because stocks so far have spent the month in a decline," he said.

Shock Factor'

The "shock factor" from the scandal seems to have worn off, Lipper's analysis states. In September, when just four fund companies had admitted wrongdoing, the average outflow from those firms was $7.9 billion. Now, with four more companies -- Fred Alger Management, Alliance Capital, Federated Investors and Putnam Investments -- admitting transgressions, the average was just $3 billion.

Lipper predicts that as more companies are added to the list, inflows will still remain higher than outflows, but not as significantly as they have lately. Instead of switching away from mutual funds, the research firm predicts that the worst investors will do is shift their money from "tarnished" funds to untarnished funds.

Lipper's analysis said the $400 million increase in non-real estate sector funds was that sector's greatest one-month showing since May 2001, and marked the 10th time in 12 months it returned at least a 50% return. But S&P 500 Index-objective funds surprised analysts by suffering their first setback since December 2002, an outflow of $800 million.

Fixed income funds, which have fallen since interest rates hit a low in June, experienced a $3.1 billion net outflow, their least significant drop since that time. The increased bull market sentiments may cause more money to shift from fixed income funds into equity funds, Lipper's report said.

For the first time since 1984, October was an outflow month for money market funds -- and the number was a staggering $29.8 billion. This could have been a result of encouraged corporate treasurers withdrawing funds from their money market accounts and pouring it into current-asset funding.

But Henry Paulson, chairman and CEO of Goldman Sachs, said last Monday that he fears the spate of allegations could have a dramatic effect on investor confidence.

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