Stock Funds on Pace for Another Net Outflow

The stock market has rebounded in the last three weeks, but it’s unclear whether mutual fund investors are buying it.

Stock funds had a $16.1-billion net cash outflow in September, the fourth month in a row that redemptions outpaced new purchases, according to data reported Wednesday by the Investment Company Institute, the industry’s main trade group. The outflow streak is the longest since 1988.

This month, stock funds are on pace for another net outflow, according to unofficial estimates. Santa Rosa, Calif.-based TrimTabs.com Investment Research expects a roughly $9.7-billion outflow in October, based on its sampling of funds.

But TrimTabs says stock fund cash flows have turned positive at many fund firms in the last two weeks as share prices have revived.

Vanguard Group expects a net inflow of about $580 million this month for its stock funds, while Fidelity Investments expects a “fairly slight” outflow.

Meanwhile, investors continue to flock to bond funds, many of which have risen in value this year as interest rates have fallen. Bond funds took in a net $15.9 billion in September, the funds’ institute said.

TrimTabs estimates a $12-billion inflow for bond funds this month. But investors who bought bond funds in mid-October might have gotten a nasty surprise as interest rates rebounded sharply before easing in recent days.

Vanguard is warning customers about potential interest rate risk in the Treasury bond market. A bulletin on the firm’s Web site warns investors of “irrational exuberance” for higher-quality bonds. If yields continue to rebound from their recent generational lows, investors might get whipsawed as the value of older bonds declines.

Through the first three quarters of this year, stock funds had a net outflow of $18.7 billion, the institute said, while bond funds had a net inflow of nearly $120 billion. “Hybrid” funds, which hold stocks and bonds, had an inflow of $8.3 billion.

Money market funds had an outflow of $157.6 billion through September, the institute said -- including last month’s record outflow of $62.5 billion, which reduced total assets to $2.16 trillion. Most of those outflows have been by institutional investors moving cash into other investments, with money funds yielding about 1.2% on average.