Fund Outflows a Slowing Trend

Stock mutual fund redemptions appear to be slowing after two months of heavy selling, as the market shows signs of stabilizing, fund companies say.

Equity fund investors still may end up redeeming more in July than the net $18.1 billion they withdrew in June. Estimates from some data trackers indicate July redemptions may top the record $30 billion that was pulled out in September.

But fund companies say the trend has changed since stocks began to resurge July 24. On Tuesday, most major market indexes rose modestly, adding to Monday’s big gains.

“It’s making my life a lot easier,” said Steve Colton, manager of the Phoenix-Oakhurst Growth & Income Fund in Scotts Valley, Calif. Before July 24, Colton said, he was selling small portions of each of his portfolio holdings on an almost daily basis to meet investor redemptions.

But over the last five days outflows have slowed to 10% to 20% of their previous pace--allowing Colton, in turn, to halt stock sales, he said.

The shift shows how more mutual fund investors in recent years have become performance-followers--that is, they sell when stocks are falling, and buy more when prices are rising. That means fund managers could face another wave of redemptions if stocks head down again, analysts warn.

Official fund cash flow data for July won’t be reported by the industry until late August, but AMG Data Services of Arcata, Calif., estimates that a net $31 billion was redeemed from stock funds through July 24. The net redemption figure is the amount that investors took out of the funds in excess of new purchases.

Whatever the magnitude, July is certain to show a second straight month of net outflows, after eight months of inflows. Until last summer, stock funds overall had recorded net monthly inflows almost consistently since 1989.

Yet even with June’s outflow, stock funds took in a net $54 billion in the year’s first half, outpacing the $49-billion cash inflow in the first half of 2001, according to the Investment Company Institute, the industry’s main trade group.

Analysts say that reflects how many investors continue buying funds through 401(k) retirement plans or other regular savings programs, even though they may shy away from “discretionary purchases” of funds in rough markets.

What’s more, recent cash outflows have been small relative to the size of the fund industry. June’s net withdrawals were 0.5% of the $3.1 trillion in total stock fund assets.

Nonetheless, any fund redemptions can deepen market declines because many funds keep little free cash on hand. On average, stock funds had 4.6% of assets in cash as of June 30.

Colton is among many managers whose mandate is to stay “fully invested” in shares, which generally means holding less than 2% of assets in cash. Funds that are fully invested may fare best when the market rallies, but they also have less of a cushion if stocks fall--or if redemptions surge.

Like Colton, many large fund companies say they’ve gotten a reprieve from investor redemptions since the market’s July 24 turnaround, when the Dow Jones industrial average soared 488 points. In the last five sessions the Dow is up 12.7%.

At Boston-based Fidelity Investments, July outflows “could be slightly more” than those in June, when a net $2.9 billion came out of stock funds, said spokesman Vin Loporchio. But, he said, “There has been more interest in equities in the past few days since we’ve seen a shift in the market.”

At Vanguard Group in Valley Forge, Pa., about $3.5 billion has come out of equity funds this month, said spokesman Brian Mattes. But Mattes, who worked Vanguard’s phone lines for two hours Monday, said, “The tone has changed. I didn’t get a single exchange or redemption request this time, but I did get a lot of purchase orders.”

At San Francisco-based Charles Schwab Corp., a net $3.2 billion came out of the firm’s stock fund supermarket this month through Monday, compared with $1 billion in June, said spokesman Lance Berg. But he said that after weeks of heavy redemptions, “the last few days have been more mixed.”

Fund cash flows demonstrate how the investing maxim “buy low, sell high” is easier said than done, fund managers say.

Said Colton: “People just want a little bit of confidence that we’ve hit a bottom in the market. My friends, relatives and acquaintances say they want to see it go up, and then they will buy more.”