Stock Funds Post Record Outflow

Investors, as predicted, pulled a record dollar sum from stock mutual funds in July as the market dived to five-year lows and fear levels soared, a new report shows.

But the surprise to some analysts is how quickly investors began buying equity funds again, once the market rallied in late July.

Some major fund companies say their stock funds will show net cash inflows for August, though the industry overall may still record a modest outflow.

In July, stock funds suffered a net cash outflow of $52.6 billion, according to a report released Friday by the Investment Company Institute, the funds’ chief trade group.

That was the biggest monthly net outflow in dollar terms in the industry’s history, surpassing the $30 billion that exited stock funds in September 2001.

But as a percentage of total stock fund assets, the July outflow was 1.7%, the institute said. That was far below the 3.2% net cash outflow from equity funds in October 1987, when the market suffered its worst one-day crash in history.

Still, at 1.7% of assets the July cash outflow was the second- biggest ever.

Fund net inflows and outflows are measured by subtracting redemptions and exchanges from new purchases each month.

In July, new purchases of fund shares increased from June despite the market’s woes: Investors bought $72.7 billion in stock fund shares in July, up from $67.1 billion in June.

But redemptions by fleeing investors rocketed 32% in July, to $102.6 billion from $77.8 billion in June.

Meanwhile, other investors were exchanging stock fund shares for shares of bond funds and money market funds within the same fund company. Exchanges yanked a net $22.7 billion from stock funds in July, up from $7.6 billion in June.

As many investors sought securities they perceive to be safer than stocks, bond mutual funds had a record net cash inflow of $28.1 billion in July, the institute said.

Money market funds took in a net $54.6 billion in July.

At the end of July, stock funds held a total of $2.77 trillion in assets, while bond funds held $1.35 trillion and money market funds held $2.25 trillion.

With the surge in fund redemptions, some analysts questioned whether the industry might be at the beginning of an extended wave of selling by investors fed up with the long bear market. But as equity prices rebounded in late July and early August, buyers returned.

Vanguard Group, the second-biggest fund company, estimated that its stock funds would see a net cash inflow of about $350 million in August, a spokesman said.

Fidelity Investments, the biggest fund company, said stock fund purchases and sales were running about even for the month, spokesman Vin Loporchio said.

At T. Rowe Price Associates, spokesman Steve Norwitz said, purchases held up in August while redemptions tumbled, producing “very good” cash inflows for stock funds. “I’m frankly surprised that the money has come back in August,” Norwitz said, citing the fear level in the market in July.

Don Cassidy, analyst at fund industry tracker Lipper Inc. in Denver, said the July sell-off may have been so intense that it “cleaned out people who might have sold later,” whether the market had rallied or fallen further.

But Cassidy said many of the investors who have shifted money out of stocks and into bonds and “cash” accounts may not soon return those dollars to equity funds.

“To the degree they’re buying bond funds, that probably represents a long-considered decision” to lighten up on stocks in favor of a potentially safer asset, Cassidy said.

“I think that money will be out of reach of stock funds for a while.”

Still, the fund industry has mostly enjoyed net cash inflows to stock funds since the bear market began in March 2000. That is partly a function of automatic investing plans--such as 401(k) retirement savings accounts--in which many investors continue to favor stocks, taking a very long-term view of the market.