Inflow to Domestic Funds Drying Up
Sunday, September 23, 2007
NEW YORK -- Only a fool would have stayed in the market after the dot-com collapse. To look past the stock market's swoon and stay invested would have been a mistake, right?
Perhaps, for those nearing retirement or getting ready to pay for college. But the strong returns that emerged after the dot-com slide illustrate again that it's often wiser for long-term investors to simply stay invested.
It seems some investors have not learned this lesson, one that could perhaps help them navigate the market's latest bout of jitters. Money flowing into mutual funds that invest in domestic stocks has fallen 50 percent since a peak in 2003, a study by fund tracker Lipper has found. What is perhaps most surprising, given the stock market's strong performance in recent years, is that flows into U.S. stock funds haven't risen.
"The whole phenomenon of investor flows chasing performance has been tempered somewhat in recent years due to concerns about market volatility," said Edward Giltenan, spokesman for the mutual fund trade group the Investment Company Institute, noting that some investors are realizing how difficult it can be to time the market.
"At the same time, we saw investors increasingly getting the message that they need to be diversified, long-term investors," he added.
Those investors who never left the market or who waded back in right after the tech bubble implosion had reason to celebrate: 2003 was the strongest year since 1967 and helped make up for lost ground.
And while not as strong as 2003, results in 2004, 2005 and 2006 were respectable, showing at least average gains. But it seems some investors were tending to bruises left by the dot-coms.
"I think that really put a dent on investors' appetite," Tom Roseen, senior research analyst at Lipper, said of the 2000 to 2002 market pullback. "So many people were not properly diversified. I think they were burned so badly that they threw in the towel."
Often when investors retreat and decide not to ride out the market turbulence, they rush back in after a strong run in the markets. Not this time, though.
Net inflows into domestic stock funds have fallen to a level not seen since 1994, the study found, suggesting that investor interest in markets abroad and, to a lesser extent, competition from new investments such as exchange-traded funds, or ETFs, have curtailed how much money investors are channeling to domestic stock mutual funds.
But the strong gains in economies and stock markets outside the United States have proven to be powerful calls for many investors in recent years.
"You begin to see relatively better returns in foreign markets and investors began allocating money that way," said Giltenan, referring to findings in the study, which in part relied on ICI fund flow data.
Investors now put about $12 billion per month into world stock funds, according to the findings. The study examined monthly stock fund flows from 1984 though June.
"People had been preaching for years that we should be diversified in other areas, not just the United States," Roseen said, noting that some investors had obviously received the message.
With investors keen on adding to their international holdings for the sake of diversity, domestic stock funds have taken a hit. Their net flows are essentially at zero month over month, the study found.
But its authors contend the picture would be worse for stock funds as a whole were it not for the increasing popularity of life-cycle funds. These products are designed to let investors begin investing and leave the fund on autopilot, to gradually move into more conservative areas such as bonds as investors approach retirement.
"People were so scared that they didn't want to to do any more research," Roseen said.
And while it's impossible to predict where investors will head next, he said that some are showing increased interest in funds that give portfolio managers broad leeway to invest in many corners of the markets.
"I do believe that there is going to be a shift in the tide. We are still seeing fairly strong flows in multi-cap funds," he said.