It's not clear exactly which straw was the last one, but the camel is not in good shape.

June was the worst month ever for mutual fund net flows, according to Lipper of New York, and July is not looking any better.

Fund investors have apparently reached their breaking point, according to Donald Cassidy, a senior research analyst at Lipper. Investors have endured a bear market that began in March of 2000, international and domestic crises and several major corporate indiscretions. Enough may finally be enough.

"It's hard to put an exact finger on [what caused] people to reach a breaking point, [but] June is when we started seeing the major averages, the ones people hear about on TV, reaching their September bottoms," Cassidy said. "People were saying, Uh oh. We're in for more here.'"

Mutual funds experienced net outflows of $45.8 billion in June, according to Lipper. While Lipper's data only goes back 10 years, that is almost assuredly a record high, Cassidy said. Although bond funds took in a net $18 billion in June, also a record, equity funds experienced a net outflow of $13.8 billion and money-market funds a net outflow $50 billion.

The $13.8 billion equity fund outflow is the third-highest one-month total ever and the first net outflow for equity funds since September. July has been even worse. Through July 17, equity funds suffered a net outflow of $18.5 billion during the month, according to AMG Data Services, a mutual fund asset-tracking firm in Arcata, Calif. For comparison, the highest equity fund outflow ever was $20.7 billion in March 2001, according to the Investment Company Institute.

The huge June outflow follows positive equity fund flows in the year's previous months. Equity funds had drawn in a net $72.1 billion through May, nearly double the amount at the same time in 2000, according to the ICI.

Of the $13.8 billion that flowed out of equity funds, $12.7 billion came from U.S. diversified funds, according to Lipper. Among those, large-cap growth funds were hit hardest, with $3.6 billion in net outflows.

What could be a bigger concern than equity outflows for the fund industry is the simultaneous exorbitant outflows from money funds. June is normally one of the weakest months for money fund flows because, among other reasons, personal and corporate tax withholdings are due. However, the $50 billion in outflows this year is more than the June outflows in 2000 and 2001 combined, according to the ICI.

That could be disastrous news for the fund industry because it is an indication that investors are not just moving money from equity funds to money funds while the market is down, Cassidy said. Because of the low rates of return currently offered by money funds, investors appear to be turning to other products, like bank CDs. Getting that money back into funds could prove difficult if and when the market begins to turn around.

"Obviously, some of the money is going into bond funds, but some investors may be closing [their] relationships [with investment firms] altogether," Cassidy said. "Down the road, the fund business may have to fight to get that money back [from] the banks. In the past, when we had a dip, the money would remain at the fund complex, even if it wasn't in equity funds"

While June's numbers are discouraging, they are not the whole story, according to Avi Nachmany, director of research at Strategic Insight of New York. It is important to look at how portfolio managers are reacting, as well, Nachmany said.

"Everyone talks about what investors are doing in an alarmist way, but the market question is not what investors are doing. It's what portfolio managers are doing," Nachmany said. "That's where liquidity issues come in."

Indeed, when investors redeem substantial numbers of equity fund shares, portfolio managers typically react with less emotion and serve as a buffer. In March 2001, when investors redeemed a net $20.7 billion in equity fund shares, portfolio managers net purchased, Nachmany said. In September 2001, when investors redeemed $29.4 billion, portfolio managers only redeemed about $10 billion.

That might comfort some U.S. corporation board members, but it doesn't restore the revenue lost by fund companies as investors exit mutual funds.

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