A record $20.6 billion flowed out of stock mutual funds in March, the largest ever one-month outflow in dollars and the fourth largest outflow ever in percentage of assets. But, the records do not reflect most shareholder's sentiments, according to industry analysts.

The outflows amount to 0.56 percent of total assets, the worst month for outflows since November 1988 when outflows amounted to 1.61 percent of total assets, according to the ICI. But March's spike in outflows is relatively small considering the prolonged downturn in market performance, according to Avi Nachmany, co-founder and director of research for Strategic Insight of New York.

"You had a little spike," he said. "But that spike was one half of one percent, so it was only a small increase in investors' inclination to redeem."

The small percentage of investors that did decide to redeem their shares were most likely reacting to market performance which dropped precipitously in March, Nachmany said.

However, the fund industry is insulated from heavy redemption activity because nearly half of the industry's assets are in retirement programs, he said. Investors saving for retirement generally have longer investment horizons and are not as likely to move their assets during times of market volatility, he said.

New sales of funds actually increased in March over February by about $5 billion, yet another indication that investors are not redeeming in droves, Nachmany said.

Still, the month's activity was notable in that domestic equity funds recorded net outflows of $15.72 billion in March, the first time the category has recorded net outflows since August 1998, according to the ICI.

Flows for taxable bond funds and municipal bond funds were positive in March, but down from the previous month by $9 million and $851 million, respectively.

Although stock fund flows through March amounted to $1.2 billion, stock fund flows are down $139 billion from the same period the previous year, according to the ICI.

"This is typical shareholder reaction to downward markets," said John Collins, an ICI spokesperson. Usually in falling markets, shareholders increase redemption activity and sales slow, he said. However, March's outflows are small compared to the total amount of assets held in funds and shareholders do not appear to be panicking, Collins said. Total assets held in funds dropped 3.8 percent to $6.637 trillion in March.

The mass outflows the fund industry experienced in March could signal a shift in investors' long-term market expectations, said Ramy Shalaan, an analyst with Wiesenberger, Thomson Financial of Rockville, Md., a mutual fund tracking service. Fund flows have been protected from market fluctuations in the past three or four years by investors who are willing to keep their money in their funds believing that markets would recover, he said. Those investors' intuitions were generally correct and markets did recover, he said. However, consistently poor market performance in the past year coupled with March's market crash may have changed some investors' sentiments, he said.

But a strong April could revive flows, he said. Historical patterns have shown that investors are quick to forget market downturns at the slightest indications of renewed strength, Shalaan said. Just as the market's plunge in March may have broken some investors' faiths, strong market performance in April could revive them, he said.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.