Investors have been running for cover, and with 1,038 additional fixed-income and 308 new money market funds to hit the market since the beginning of the bear market, fund companies have been keeping pace, hoping to provide shelter from the storm.

If this bear market continues, investors might continue running for cover - right past and out of the mutual fund arena. As much as fund industry executives might hope they are providing only temporary shelters with such new offerings as the Fidelity Total Bond, Schwab Hedged Equity and Fifth Third LifeModel Conservative funds, until the market recovers, it might pay to find out exactly where investors have been stashing their money.

In this special edition, Mutual Fund Market News takes a look at the effect of three long years of this dreadful market to ask a few important questions. What areas of the fund business have attracted assets? Which companies have been successful in landing that business? What do experts think the future holds for these investment categories?

The $1 trillion decline in mutual fund assets from $7.3 trillion at the height of the bubble in March 2000 to $6.3 trillion at the end of February is somewhat commendable. That's a mere 14% drop compared to the 37% devaluation of the S&P 500 from $12.7 trillion to $8 trillion during that period of time. Equity funds, in fact, took in nearly $304 billion in net flows during that period, and 401(k) contributions have held up fairly steady, reaping a net $120 billion last year.

Yet the cracks are showing. Since last June, investors have taken $110 billion out of stock funds. The argument that now is the perfect time to buy stocks cheap is evidently wearing thin. Those who have been listening several years now to quarterly prognostications of economic recovery right around the corner, are wondering when that recovery will ever happen. Participation in 401(k) plans has also dropped to 73%, its lowest number since 1991.

Paltry returns of money market mutual funds aren't helping, either. True, since the beginning of the bear market, investors have parked an additional $539 billion in money market mutual funds. But that trend has begun to reverse - and the loss of money market fund assets could become even more pronounced if the Federal Reserve cuts the Fed funds rate even further below the current 1.25%.

For the first time in their history, investors withdrew money, albeit a small $14 billion, from money market mutual funds last year. So far this year, another $70 billion has left money funds.

Cash, meanwhile, has been pouring into banks, which are sitting on top of about $2.8 trillion. Money market bank accounts grew $400 billion in 2002.

But don't think the approximately $5 trillion sitting in cash or cash-equivalent funds, including $2.2 trillion in money market mutual funds, is a windfall waiting to happen once the market turns around. The experts don't think equity funds are going to have an easy time of winning back any of that money from bear-weary investors, and Baby Boomers, who begin retiring in 2010, are most likely going to favor safety over growth.

Yes, signs of investor disillusionment are resoundingly clear.

Still, there have been a few winners during this painful bear market. Bond funds, obviously, have been the second-biggest overall gainers of assets after money market funds, taking in $378 billion in additional money between March 2000 and the end of February.

Hedge funds are up $170 billion since the beginning of the bear. Separately managed accounts -- which many fear might become the bane of mutual funds' existence -- have risen by $123 billion. Stable-value funds have netted an additional $110 billion, and exchange-traded funds, principally because of their arbitrage capabilities, are up $60 billion. Even fixed annuities have gained $30 billion in net sales. And real estate investment trusts now appear to be a viable category of their own, with just under $9 billion in assets.

As those moving assets into stable- value funds returning a mere 4% might say, the more boring and conservative, the better.

Copyright 2003 Thomson Media Inc. All Rights Reserved.,

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