Investors, mystified about current events and the seesaw stock markets of the past few months, invested less money in equity funds in May than in any month since April 2003, research firm Lipper reported last week.

The equity fund inflows of $10.5 billion were modest, at best, and represented an 80% drop-off from just four months earlier, even as the money market inflows of $5 billion represented that group's best month since last June.

Bad News for Bonds

The news was much worse for bond funds, which suffered their greatest outflow in history, $17.5 billion. With a rate hike looming, bond funds look to be in a yearlong free fall. The $17.5 billion smashes the previous record outflow of $13.3 billion set last August, at the end of a "scary upward pulse" in interest rates, Lipper said. In particular, long-term bonds were pummeled, suffering $12.5 billion in outflows, presumably because they are most drastically affected by rising rates. In all categories, funds lost $2 billion.

"It was a month of some reversals and anomalies in net flows, probably reflecting the confused sense that investors have as they look out at the larger world as well as the volatile and shifting markets," said Lipper Senior Research Analyst Don Cassidy in his company's month-end analysis.

The funds that are being bought reflect more of that confusion and caution. Mixed and miscellaneous funds, which are income-heavy, saw the greatest inflows, at $5.7 billion. More specifically, balanced funds took in 40% of the mixed and miscellaneous money. The report said, "Balanced funds are the quintessential choice for the undecided or confused."

More puzzling was the performance of world equity funds, which were supposed to thrive thanks to the weakening dollar. For May, though, world equity funds took in just $3.2 billion, with the Pacific region being the only region not to suffer outflows. Global funds took in $1 billion, while international funds took in $3.1 billion.

In breaking down U.S. diversified equity funds, Lipper reported a $2.7 billion drop in large-cap funds, a $4 billion gain by multi-cap funds, a $700 million increase in mid-cap funds and a drop of $1.3 billion by small-cap funds. In analyzing those numbers, Lipper said that multi-cap funds did so well because they are "a choice for those lacking conviction."

In a good month for the stock market, a drop in inflows is atypical. Lipper called the still-moving scandal a key factor. Beside the 20 tainted fund shops and the $15 billion they have lost since the scandal, Lipper said "one cannot calculate things that did not happen," such as investors holding money away from equity funds and pouring it into exchange-traded funds and "mattresses or banks."

More reasons? Lipper suggested that despite job creation, consumers are in debt, are no longer refinancing their homes and, perhaps most importantly, they are disenchanted with international events and the possibility of another terrorist attack.

"And the November election draws nearer with no clear outcome, adding yet another sense of uncertainty," according to the report.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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