Investors Pull Money Out of Stock Funds

January 08, 2012, 5:54 PM EST By Charles Stein

Jan. 6 (Bloomberg) -- U.S. stock mutual funds that invest in domestic equities had their second-worst redemptions last year as record market swings sent investors to the perceived safety of bond funds.

Investors pulled an estimated $132 billion from mutual funds that invest in U.S. stocks, the fifth straight year of withdrawals for domestic funds, according to preliminary data from the Investment Company Institute, a Washington-based trade group whose numbers go back to 1984. Withdrawals reached $147 billion in 2008 when the Standard & Poor’s 500 Index fell 37 percent, including dividends.

Withdrawals accelerated in May and June amid concern that weaker European economies would not be able to repay their debts. They peaked in July as Congress debated whether to lift the nation’s debt ceiling. Those events, as well as lingering memories of the 2008 selloff and a subpar U.S. economic recovery, may all have contributed to investor discontent, said Russel Kinnel, director of mutual fund research at Chicago-based Morningstar Inc. interview.

“A lot of people remember they got burned so they are more sensitive to bad news than they were before,” Kinnel said in a telephone interview.

‘Bear the Pain’

Volatility increased in the third quarter as the U.S. lost its AAA credit rating at Standard & Poor’s and concern about the European debt crisis intensified. The S&P 500 moved 2.4 percent on average between its intraday lows and highs, the most for any quarter since 2009. The Dow Jones Industrial Average alternated between gains and losses exceeding 400 points on four straight days in August, the longest such streak ever.

“Investors just can’t bear the pain, which sets the stages for an unwillingness to take risk,” said Christopher Blum, chief investment officer for behavioral finance at JPMorgan Asset Management in New York.

The redemptions from domestic stock funds have come from managers who pick equities in an attempt to beat market benchmarks. Actively-managed funds saw withdrawals from 2007 through 2010 while index funds attracted money in each of those years, Morningstar data show. The same pattern held through the first 11 months of 2011.

“People are convinced that active management has failed to deliver,” Geoff Bobroff, a mutual fund consultant based in East Greenwich, Rhode Island, said in a telephone interview.

Leaving Active Funds

Funds that invest in international stocks attracted about $6 billion last year, ICI data show, down from $58 billion in 2010. Taxable bond funds saw an estimated $141 billion in deposits, below the $230 billion they attracted the previous year. Municipal bond funds suffered withdrawals of about $12 billion. In 2010 they had $11 billion in deposits.

The ICI has released monthly flow data through November and weekly numbers through Dec. 28, which may be revised. Final numbers for December will be published at the end of January, according to the ICI.

Domestic equity funds captivated the American public in the 1990s, thanks to a stock market that rose at an annual pace of 18 percent a year and the well-publicized success of stock pickers such as Peter Lynch of Fidelity Investments. Lynch guided Fidelity’s Magellan Fund to gains of 29 percent a year from 1977 to 1990 compared with 15 percent annual returns for the S&P 500 index.

In the past 10 years the S&P 500 returned 2.9 percent annually, including reinvested dividends. Investors suffered double-digit losses in 2001, 2002 and 2008.

Better news on the U.S. economy and a resolution of Europe’s debt problems might inspire investors to begin a return to U.S. stock funds, said Blum. In the meantime those investors could be missing good opportunities.

“There is a risk to not owning equities,” he said.

--Editors: Christian Baumgaertel, Steven Crabill

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To contact the reporter on this story: Charles Stein in Boston at cstein@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel in Boston at cbaumgaertel@bloomberg.net

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