Investors Pump Big Cash Into Stock Funds

Despite getting smacked by two straight down years for stocks, investors plowed a net $19.6 billion of new money into equity mutual funds in January.

The cash inflow, reported Wednesday by the Investment Company Institute, was the highest monthly total in a year and the fifth-highest January inflow ever.

The tally surprised some analysts who expected investors to be less willing to buy stock funds after suffering heavy losses in 2001 and as the market weakened again in January.

The month’s total, which measures gross fund purchases minus redemptions, suggests many investors continue to have faith in stocks as a way to meet long-term goals such as retirement.

Even so, other data for January show fund investors in general are playing it safer, diversifying their portfolios and avoiding the most aggressive “growth” and technology sector funds.

Bond mutual funds took in a net $10.6 billion in new cash in January, continuing what has been a major shift of investors’ capital into lower-risk funds over the last year, according to data from the Investment Company Institute, the funds’ chief trade group.

Also, real estate-related stock funds have seen steady inflows this year as investors seek the cushioning effect of high dividend yields, said Bob Adler, head of AMG Data Services Inc., an Arcata, Calif., firm that tracks industry trends.

But volatile tech-stock funds have suffered net outflows every week this year, Adler said.

“Investors are going about this with a hint of caution,” said Lars Schuster, analyst at Boston-based Financial Research Corp., which tracks investment trends. “It’s a balanced attack with an emphasis on diversification.”

Although the stock market overall has been weak again this month, some major fund companies say investors still have been net buyers of equity funds. Fidelity Investments, Vanguard Group and Strong Investments say their stock funds have seen positive cash flows this month, though not necessarily on January’s pace.

Bond fund cash flows also have stayed positive this month at Fidelity and Vanguard, the two biggest mutual fund firms, the companies said. Though diversification may be one reason for the interest in bond funds, analysts say “performance-chasing” could be another: Many small investors favor fund categories that have the best recent performance records, and most major types of bond funds made money last year, while the average stock fund lost 11%.

More investors also may be less inclined to keep cash in ultra-safe money market funds as yields fall to record lows. Data from the Investment Company Institute show that money funds used primarily by small investors had a net cash outflow of $6.9 billion in January.

The average seven-day money fund yield eased this week to a record low 1.39%, according to IMoneyNet.com.

The official stock fund cash flow data for February, to be issued in late March by the institute, will give a stronger clue about investor trends this year, Schuster said.

“It will be interesting to see if the solid optimism is still there,” he said.

January tends to be a big month for fund inflows because many investors wait until the December ritual of fund capital gains distributions has passed before buying new shares, Schuster said. Investors also may focus more on financial planning at the start of a year.

In a separate report, the Investment Company Institute said this week that stock funds distributed an estimated $72 billion in capital gains to shareholders in 2001, the lowest total since 1995, as the bear market resulted in fewer realized capital gains for funds.