October was a positive month for equity mutual funds, which took in $15.3 billion, Lipper reported. The company compared the month's stock market rally to a similar period of good fortune in 1934, calling it a potential signal that the coming year could be prosperous.

In 1934, as in 2004, Lipper said, October marked a year of contraction in prices, increased trading volumes and the small- and mid-cap outperforming indexes reaching all-time highs. Combined, these factors could indicate "a very generous rally extension," Lipper said. "Obviously, one month does not a trend make, but to us and other analysts, some of the signs appear to be in place that could lift various markets, sectors, stocks and funds through their year-long 2004 consolidation."

But while stock funds as a whole had strong inflows, U.S. and international large-cap funds suffered outflows of $3.7 billion. What was particularly puzzling about the weakness in large caps was the fact that large-cap stocks on the Standard & Poor's 500 saw a rise in volume.

Hesitancy to Commit'

Instead, investors placed $12.4 billion in U.S. and international multi-cap funds and $6.3 billion in U.S. and international small- and mid-cap funds. In fact, Lipper said, investors have favored multi-cap funds for the past 10 months, "signaling a hesitancy to commit to a particular capitalization and its attendant risks." Within this group, the strongest flows were to core and value funds, which took in $5.9 billion and $4 billion, respectively, while multi-cap growth funds reaped $2.5 billion.

Investors displayed the same hesitancy toward most sector funds that they displayed toward large caps. Aside from real estate investment trusts (REITs) and natural resource funds, which drew in a combined $2.9 billion, sector funds had a month of outflows. Science and technology funds saw outflows of $1.1 billion, as did health and biotech funds. The remaining sector funds had a total of $0.3 billion in outflows.

Bond funds had inflows of $1.2 billion, a small number. Long-term municipal bond funds, which have been declining for almost three years, are beginning to see less drastic outflows than previous months. The outflow for October was $0.5 billion, but, according to Lipper, 12 to 18 months ago, the outflows were in the billions rather than a fraction of billions.

Lipper eschewed the many different analyst hypotheses for why long-term municipal bond funds have been hemorrhaging. "None of the explanations jibe with the continued strong buying of individual muni funds by retail investors during the same period, or with the fact that, until sometime this year, flows to intermediate munis were positive, not negative," Lipper said.

Corporate bond funds had another strong month, taking in $2.6 billion. In September, they garnered $3.1 billion.

What was surprising to Lipper in the fixed-income sector was the fact that U.S. government funds took in $1.1 billion, almost all of which went to short and short-intermediate funds.

Money market funds had another month of outflows, though less severe than in September. The improvement was not a surprise, according to Lipper, because September marked quarterly tax payment time. But it was less of an improvement than expected. Even though the outflows dwindled down to $17.8 billion from $30.3 billion the month before, it marked just the third time since 1984 and the second year in a row that money market funds suffered an October outflow. In fact, adjusted for the season, the outflows for October were $36.5 billion, whereas they have averaged $13.7 billion in inflows since 1984.


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