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February Doesn't Make Funds Shiver

After near-record highs set by equity funds in January, not unexpectedly, February couldn't live up to the same expectations, according to a monthly report from Lipper. But it was a brave attempt.

Equity mutual funds experienced respectable net inflows of $30.5 billion for February. January's $47 billion in inflows, according to senior Lipper analyst Donald Cassidy, happened because "special seasonal factors were at work." In February, "seasonal and behavioral factors that boosted the money intake in January were absent, as was the earlier strong showing of stock prices," according to Lipper.

In its monthly FundFlows Insight Report, Lipper noted that even the $30.5 billion inflow for February, averaged out over an entire year, would smash the previous one-year record of $270 billion set during 2000. "The slower pace of February should be no cause for concern in the asset-management industry," the report said.

Even amid that slower pace, February still marked the 12th consecutive month of inflows for equity funds. Lipper called the $30.5 billion "fairly impressive," considering that the Nasdaq had a down month and equity funds overall felt just a slight uptick. Inflows in bond funds did not shift either way, according to Lipper, merely showing "a mild decline" from the January inflow of $2.8 billion.

Research from the New York firm Strategic Insight said February was even better than Lipper's numbers show. Strategic Insight showed inflows at more than $40 billion and bond fund inflows at about $3 billion. Last month, SI had equity fund inflows $13 billion higher than Lipper, at $60 billion compared to $47 billion. Said Strategic Insight's February report, "SI now estimates that equity/balanced fund inflows during the first quarter will near the prior quarterly inflow record of $134 billion reached in the first quarter of 2000."

According to Avi Nachmany, Strategic Insight's director of research, "By their actions, fund investors continue to demonstrate a high degree of confidence in the stock market and in the mutual fund vehicle. While market fluctuations naturally continue to impact the level of new investments, sustained large stock fund inflows are likely even if equity markets remain in a trading range."

Lipper said high-yield funds and TIPS funds led the inflow, with money market funds once again suffering thanks to their recent low returns and bevy of other options. "An improvement in mix of fee levels" was also cited by Lipper.

Concern over the Nasdaq's and New York Stock Exchange's performances and equity funds should not be substantial, Lipper said, "because for the most part the types of funds people are buying indicate a cautious mood rather than a speculative one." However, the firm did warn that the $8.4 billion in inflows by world equity funds did suggest a possibility of aggressive investing by some. World equity barely edged out mixed and miscellaneous equity for second place, which experienced $8.3 billion in inflows.

Sector funds dropped from $2.3 billion in January to $1.6 billion in February, while real-estate funds continued to smash their personal bests. A record $1.1 billion in new money gushed into real estate funds. "Since mid-2001, real estate funds have reigned as the preferred way to earn high current income with perceived limited risk," Lipper said, comparing the real estate funds' rise to the utility funds' demise. Utility funds had $100 billion in outflows during February, making it one of just two sectors to suffer outflows, with the other being science and technology funds.

Fixed income funds basically stayed the same as January, with high-yield bond funds losing $3.5 billion amid reports that they have already had their best days of the cycle.

As far as the state of the fund industry amid the still developing scandal, Lipper said the numbers speak for themselves. "Anecdotal evidence" of money shifting to ETFs and stocks are just that, anecdotal.

"Mutual fund flows in aggregate have survived the past six months of intense scandal shock quite well," Lipper's report said. It added, "The fund business is fortunate that the revelations of dark deeds came to light after a period of strong recent performance, rather than a year earlier near the scary bottom in late 2002." So February should not feel so bad.

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