Stock Fund Inflows Plunge 90% in 2001

Americans’ love affair with stock mutual funds continues to cool, new data show: The funds last year took in the smallest amount of net new cash since 1990, and inflows for January, traditionally a strong month, appear to be weak.

The sharp falloff in fund investing raises questions about the stock market’s prospects for this year. Though mutual funds control only about one-fifth of total stock assets, the record cash inflows the funds enjoyed in the late 1990s helped propel the bull market.

Those inflows dwindled dramatically last year amid Wall Street’s worst decline since the mid-1970s. Stock funds took in a net $32.3 billion in 2001, a 90% drop from the record $309-billion inflow in 2000, according to data released Wednesday by the Investment Company Institute, the fund industry’s chief trade group.

In December, stock funds had a net inflow of $3 billion, down from $15.3 billion in November.

Net new cash flow is gross fund purchases minus redemptions.

After two straight years of losses in the stock market, many investors continue to shift assets to more stable and conservative accounts such as bond funds and money market funds, analysts say.

Ultra-safe but low-yielding money market funds saw a record inflow of $375 billion in 2001, fueled by institutional investors, ICI data show. Bond funds took in a net $87.4 billion--their best annual total since 1986 and their first positive year since 1998.

Despite the deep bear market on Wall Street, more stocks rose than fell on the New York Stock Exchange and on Nasdaq in calendar 2001, thanks to the fourth-quarter rally. Yet 83% of stock mutual funds lost money, according to data firm Weiss Ratings Inc.

“These results confirm that even professional [stock] mutual fund managers can’t protect investors from losses in a broad market decline,” said Martin Weiss, chairman of Palm Beach Gardens, Fla.-based Weiss Ratings. The average U.S. stock fund sank 11% last year, according to fund tracker Morningstar Inc.

But, some analysts, such as fund industry consultant Avi Nachmany of New York-based Strategic Insight, say still-positive cash flows--in the face of dismal returns--show investors have considerable faith in stock funds as a long-term investment.

While gross stock fund purchases fell 28% in 2001 from 2000, redemptions also declined, off 14%. Overall, the numbers suggest that many investors continued to make automatic stock fund investments through retirement plans such as 401(k)s, while holding off on discretionary fund purchases.

“That’s a typical shareholder reaction to a bear market,” said ICI spokesman Chris Wloszczyna. “Many people do nothing.”

But some investors say they’ve had it with stocks.

Lance Dore, 41, an analyst for a San Diego real estate company, said he stopped buying stocks and stock funds for his individual retirement account and other accounts about a year and a half ago, shortly after the bull market began crumbling.

“I just said, ‘I don’t need this grief,’” Dore said. “I stopped cold turkey.” He and a partner began investing in apartment complexes instead.

After the strong fourth-quarter market rally, some fund managers may have been hoping for a jump in cash inflows in January. Fueled by year-end bonus money, January is typically a big month for stock fund purchases: From 1998 through 2001, for example, January inflows averaged $25 billion.

This year, increased federal limits for annual IRA and 401(k) retirement plan contributions were expected to boost fund inflows in January.

But the market is off to a poor start this year, putting a damper on fund cash flows.

TrimTabs.com Investment Research of Santa Rosa, Calif., projects a $1.6-billion net outflow from stock funds this month, and another data tracker, AMG Data Services of Arcata, Calif., expects a modest inflow.

Bond funds and money market funds, meanwhile, are expected to have inflows again.

Some major fund companies say their customers continue to buy stock funds. Fidelity Investments and Strong Funds are reporting inflows this month, while Vanguard Group said it is having one of its strongest sales months ever.

Still, after growing at a 20% annual clip through the 1990s, the fund business has “reached a meaningful plateau,” said Geoff Bobroff, an independent consultant to the industry based in East Greenwich, R.I.

ICI data show that 52% of U.S. households owned mutual funds in 2001, including stock funds in most cases. In 1990, only one in four held funds. From here, further penetration is “likely to prove costly and difficult,” Bobroff said.

Whether that will mean less fodder for a new stock market rally isn’t clear, however. Automatic retirement plan purchases provide a continuous stream of new money to funds: Even after a two-year market downturn, about 80% of 401(k) contributions still are being directed to stocks, according to a survey by Chicago-based benefits consultant Hewitt Associates.

What’s more, because investors typically “chase” performance, if a strong new bull market takes hold on Wall Street, stock funds are likely to enjoy a new cash windfall, some say.

Bobroff said fund inflows may surge again this decade as aging baby boomers increasingly focus on retirement saving and if a brighter economy allows more people to take advantage of higher IRA and 401(k) limits.