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Stock Funds Hope For a Bigger Bang


Stock funds started the year with a bang.

In the week ended January 9, $7.5 billion flowed into mutual funds that invest long-term in equities.

In the week ended January 16, another $3.7 billion came in.

The total, $11.3 billion, was the biggest two-week gain for stock funds since April 2000, according to Lipper, the fund industry statistician.

"It's kind of an impressive number,'' said Matthew Lemieux, senior research analyst in America for Lipper. "Whether this means this is the great rotation" out of bond funds and back into stock funds by mainsteam investors remains to be seen, however.

For now, he says, it looks like the release of a lot of "pent-up caution" about stocks, since the near-implosion of financial markets in 2008 and the ensuing deep economic recession.

Since the start of 2007, for instance, investors of all types have pulled $607.4 billion out of funds that invest in domestic stocks, according to the Investment Company Institute. In the same time, they've added $1.2 trillion to the coffers of bond funds.

In the last four years, that means that bond funds' share of overall allocations of assets among funds of all types has jumped from 15% to 28%. Equity mutual funds and equity exchange-traded funds, Lemieux said, have dropped from 53% to 48%.

Domestic stock funds have been the most out of favor. The last time such funds gained assets for a full month was in April 2011, according to the ICI. The last time such funds pulled in more assets than were taken out was 25 weeks ago, according to Lipper.

The causes for celebration, said Lipper's head of research services, Tom Roseen, are fairly clear. A lot of money was parked out of play during December, waiting to see what market prospects looked like at the start of the year. Then, came the "point of jubilation" when Congress agreed on enough of a budget deal to avoid the country falling off a fiscal cliff. Plus, modest but steady employment gains. Underlying it all has been a latent recognition that stocks have actually been performing well.

Overall, U.S. stocks gained 16% in 2012, according to the Lipper analysts.

In the first week of the year, equity funds of all types-including exchange-traded varieties-pulled in $18.3 billion. That was the fourth largest total inflow to such funds since Lipper began calculating flows weekly, in January 1992.

Exchange-traded funds, though, pulled back in the second week, dropping $3.5 billion after a $10.8 billion gain. Lemieux said ETFS are used more tactically by institutional investors and, as a result, are subject to "a lot quicker fluctuation.''

But stock funds gained each week. For the first two weeks of the year, domestic stock funds pulled in $5.4 billion. International stock funds picked up $5.9 billion.

"Maybe investors are feeling better about coming back into equities,'' Lemieux said.

And they're not leaving bond funds. Taxable bond funds picked up $4.6 billion in the second week of the month and municipal bond funds are up as well. Money market mutual funds dropped $9.6 billion, just as Goldman Sachs, Federated Investors, BlackRock and Fidelity Investments said they planned to publish daily values for the assets they held in such funds.

But it's too early to tell if the big bang for stock funds will hold up. Two weeks do not a year make.

In 2010, domestic stock funds were up roughly $40 billion four months into the year ... and finished flat.

In 2011, such funds were up $56 billion. And finished down by more than $100 billion, notes Lemieux.

"We've seen these kinds of runs before,'' he said.

In the third week, he expects stock funds will pull in a minimum of $1 billion.

But the first real test will be over the next two months, as public companies begin reporting their year-end revenue and profit figures, according to Lemieux.

Plus, the federal government's fiscal drama is not over, the two Lipper analysts said.

"Another question market ahead of us," Roseen said, "is what are they going to do about the budget?"

Coming next: A debt ceiling that must be resolved by the end of March. The fiscal cliff deal was just a "band aid,'' for the moment, Lemieux said.

At this point, though, the good news is that stock funds are prospering pretty much across the board, Lemieux said.

Domestically, funds that invest in large capitalization growth stocks picked up $1.4 billion. So did funds that invest in "core" middle-sized companies.

In fact, the value of stocks has been rising for nearly four years. Since closing at 683.38 on March 6, 2009, the Standard & Poor's 500 broad index of stock market values has gone up 118%.

The Standard & Poor's 500 reached a five-year high at the end of December. Just last week, on January 22, it stood at 1,490, just 75 points away from its all-time high of 1,565, set on October 9, 2007.

It's too early to guess whether stock funds will all of a sudden be investors' favorite place to park their long-term assets, nonetheless.

"We'll have to see how this sustains" itself, Lemieux said.


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