Flows Into Stock Funds Off 35% in December; Cash Holdings Drop

U.S. mutual funds suffered a decline in cash inflows this month amid volatility in stocks and as investors sought to duck tax liabilities.

Investors put an estimated $11.1 billion into stock mutual funds in December, a decrease of 35% from November, according to Trim Tabs Financial Services of Santa Rosa, Calif.

Inflows often slow down at the end of the year and pick up again in January, but some analysts said this December’s decline appeared severe. Another disturbing sign was that stock funds held only 5.8% in cash in November, lower than the 6.4% cash held in October and the lowest level since January 1977, according to the Investment Company Institute, a trade group.

The low level of cash in November is seen by some analysts as a sign that fund managers are too optimistic about the stock market’s prospects. The Dow Jones industrial average has surged about 16% since the beginning of September.

Less liquidity in the funds means more stocks would have to be sold if significant numbers of people took money out of funds. Combined with lower net flows, such a scenario could trigger a correction, if not a bear market. Cash, both from new investments and from mutual fund reserves, is a major factor in bolstering stock prices by increasing demand for equities.

Fund companies said, however, that investors were still big buyers of large-capitalization funds, such as equity income and blue chips.

Vanguard Group, which has $240 billion under management, has suffered a decline so far this month. Aggregate inflows through Dec. 27 totaled about $1.6 billion vs. $2.5 billion in November, according to spokesman John Woerth.

Vanguard’s equity funds experienced a drop to $1 billion from $1.5 billion; money market funds fell to $520 million from $625 million; bond funds slumped to $105 million from $310 million, Woerth said.

Part of the drop was due to Vanguard’s advice that investors hold off on purchases until funds made their dividend and capital gains distributions for tax purposes. He also cited a weaker market.

“There’s rising concern about the level of the market and the volatility earlier in the month,” Woerth said. “Investors put off purchasing funds until after the funds pay their annual dividends” so they can avoid paying taxes on the distributions, said Robyn Tice, Fidelity’s spokeswoman. “There was also a significant amount of volatility early in December.”

Indeed, on Dec. 6 the Dow Jones industrial average plunged 144.6 points before recovering to close down 55.16 points, after Federal Reserve Board Chairman Alan Greenspan suggested the markets might be getting ahead of themselves.

Fidelity Investments said it estimated cash flows into its domestic equity funds will turn flat after more than a $1-billion inflow in November.

Fidelity said its top-selling equity funds this month were its Real Estate Investment Portfolio, its Low-Priced Stock Fund and its Select Electronics Portfolio.

T. Rowe Price said the company was still seeing strength in large-capitalization funds, such as its equity income, growth and income and blue-chip funds.

The Investment Company Institute report on general fund flows are more accurate but a month behind current estimates. Monday it said net new cash flow into mutual funds totaled $33.60 billion in November, compared with $34.52 billion in October.

Net flows into stock funds increased to $17.11 billion, from $13.55 billion in October.

A record $209.8 billion flowed into stock funds in the first 11 months of 1996, the ICI reported, eclipsing the previous full-year high of $129.6 billion.

Investors put a net $1.34 billion into bonds funds in November, the seventh month this year that bond funds had positive cash flows. High-yield bond funds continued to attract money, the ICI said, while investors took money out of tax-exempt, U.S. government and Ginnie Mae funds.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Stock Fund Inflows

Net new cash flow into stock mutual funds, monthly totals, in billions of dollars:

Nov. 1996: $17.1

Source: Investment Company Institute