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Domestic Equity Funds Suffer $2.8B in Outflows in January

Investors poured $4.5 billion into equity funds during January, more than a $7 billion drop from December, according to Lipper of New York. Domestic stock funds were hit hard, but exchange-traded funds experienced a significant milestone.

Domestic stock funds felt more than a $5 billion drop from December to January, as the funds suffered a $2.8 billion outflow. But world equity and mixed equity funds held steady, taking in $7.9 billion and $5.2 billion in inflows, respectively.

The popularity of ETFs, however, cannot be dismissed. Lipper surmised that for the first time ever, flows of between $3 billion and $4 billion into ETFs outdistanced flows into open-ended stock mutual funds. Bond funds took in $4.3 billion, which is $2 billion better than December, while money market funds lost $21.3 billion, which is $15.8 billion more than the month prior.

Typically, January is a strong month for both the broader markets and mutual funds. In fact, January marked just the fourth time in the last 20 years in which mutual fund flows were lower than the preceding year's final month. That last happened in 1998.

As to "why this January?," Lipper had a three-pronged answer. First, there was lower month-over-month volume on the New York Stock Exchange. Retail sales continued to rise, meaning that Americans spent more than they saved. And finally, there was an increase in bear fund flows for the month.

Overall, funds of all classification types lost $12.5 billion during the month. "January rather vividly indicated, hardly for a first time, how sensitive equity-funds flows are to short-term economic and market performance conditions," said Don Cassidy, a senior research analyst at Lipper.

When broken down into the broad equity classifications of the S&P 500, U.S. domestic equity, world and sector funds, only the strong performance of world funds, which took in $7.9 billion in net inflows, saved the $2.8 billion outflow from being far worse. The other three classifications all suffered outflows, with U.S. domestic equity funds losing $8.8 billion.

Sector equity funds suffered outflows of $1.6 billion in January, with the strongest categories being natural resources and real estate and the one main weakness being science and technology, which suffered $1.5 billion of that $1.6 billion outflow.

The interesting part of the aggressive investing in world funds is the caution with which those investors are doing it. Of the $7.9 billion in inflows into world equity funds, mid-caps were clearly the strongest, seeing $6.6 billion in inflows compared to nominal inflows into large- and small-cap funds.

The fledgling U.S. domestic equities category again had one lone bright spot, and again it was multi-cap funds, which actually saw $4.1 billion in inflows during January.

Noted "with interest" by Lipper was the move away from small- and mid-cap funds by mutual fund investors, even as other parts of the investment community moved toward them. Between them, small- and mid-cap domestic funds suffered outflows of $1.9 billion. Large-cap funds had a higher return in January, and so, Lipper said, this could "represent a true shift in the market."

Lipper predicted that money market funds, which have suffered outflows for four years running now, would not lose as much money in 2005 as they did in 2004, which would mark the second straight year of a lesser drop. Investors have pulled $500 billion from money market funds since the beginning of 2002.