Despite the increasing number of securities fraud allegations at major fund shops, investors' doggedness in the face of adversity boosted stock funds to another strong performance last month.
Investors added an estimated $19.5 billion to equity funds in September, according to the latest monthly report from New York-based fund-tracking firm Lipper. While that number is down from the $26 billion in equity-fund inflows posted in August, it is still one of the best performances for equity funds in the last 18 months. That marks the seventh consecutive month of net inflows for equity funds, bringing the total up to $100 billion year-to-date. Overall, however, mutual funds gave up $31.2 billion in assets in September due to a large seasonal decline in money-market funds.
"Given that the six-month rally sustained a small correction and that the fund-trading scandal was a daily source of negativity and doubt, it appears that investors retained their balance remarkably well," said Don Cassidy, a senior analyst at Lipper. "We had been waiting for a flat or lower month to see how skittish fund holders would be, and we got one -- together with the unexpected revelations about trading abuses -- and yet, the money kept flowing nicely," he said.
The equity number is particularly impressive considering the withering criticism that has engulfed the fund industry since New York State Attorney General Eliot Spitzer launched a probe into trading abuses at four major mutual fund firms. The four firms named in the Spitzer probe, Janus Capital, Bank of America, Bank One and Strong Capital, were accused of allowing a New Jersey hedge fund, Canary Capital Partners, to engage in a series of market timing and illegal late trading schemes.
These firms suffered an estimated $7.9 billion in net outflows in September, or 25% of the industry total, including a multi-billion-dollar outflow from equity funds. It is difficult to assess the cause-and-effect relationship between the scandal and subsequent outflows in terms of dollar amounts because there are a number of factors that impact flow totals. Still, a key point to consider is that the difference between their relative outflow in September and the average for the previous eight months was significantly greater.
Therefore, Lipper makes the case that the four firms saw additional September outflows in the range of $2.5 billion to $3 billion on top of the $4 billion to $5 billion outflow that was expected, given the experience of the past several months. Lipper expects an ongoing pattern of redemptions at those firms in the months ahead, particularly from advisers, brokers and institutions.
U.S. diversified equity funds led the pack, garnering $9.7 billion in September, down from $14 billion in August. Within that universe, value-style portfolios decisively outpaced their growth fund counterparts, the Lipper data showed. Multi-cap core funds bested all diversified equity categories with an inflow of $2.1 billion. Mixed-equity funds took in $5 billion last month, representing 25% of total equity-fund flows, still well above their share during the bull run of the late 90's. Balanced and income funds tacked on nearly $2 billion apiece.
World equity funds, which offer a hedge against the declining value of the dollar, were a popular choice for defensive-minded investors as they took in $2.3 billion last month. Individual domestic sector funds showed modest expansion, with real estate and health and biotechnology funds racking up the bulk of new assets.
On the fixed-income side, bond fund outflows suffered their third straight negative month but managed to pare its losses to $5.7 billion, less than half the bond fund outflows in August. The narrower losses can be attributed to a moderate recovery in bond prices on the heels of a summer-long slump, according to Lipper.
The smaller net outflow in bond funds reinforces the concern that investors in bond funds were not implementing a prudent asset allocation strategy. Rather, they were parking their cash in bonds in an attempt to chase performance and because they were too afraid to be in equities. That is particularly alarming, Cassidy noted, because it suggests investors did not heed the lessons of the three-year bear market.
Money market funds, the most volatile of the three major asset classes, bled $45 billion in September, with nearly 90% of those losses coming from taxable accounts. That huge number is predominantly due to seasonal factors. For example, September is a quarterly estimated-tax month and the time of year when individuals make college tuition payments. Additionally, the decline in the number of home-mortgage refinancings during the summer months as interest rates rose could have also played a role, forcing many homeowners to turn to money-fund balances for cash.
"We view September's diminished but still strong flows into equity funds as an indication that investor confidence is continuing to rebuild over time, given the period and news conditions," Cassidy said. The mutual fund scandal theme will likely remain in the news for many months as new revelations and periodic settlements and admissions are made, he said. But the fact that resulting investor losses have been moderate for each fund and for each person has served as a safeguard against mass redemptions. And the fact that individuals have no real way to calculate their losses has also helped, he added.
Meanwhile, another report issued by Strategic Insight of New York last week showed that inflows to equity and balanced funds reached roughly $85 billion in the third quarter. That marks the highest quarterly inflows since the first quarter of 2000. "Month after month, investor confidence is building in a paced way. This, in turn, is benefiting a wide range of funds and management companies," said Avi Nachmany, director of research at Strategic Insight. "Yet, we do not detect much investment euphoria or opportunistic short-term purchasing attitude."
Provided that there are only modest fluctuations in stock prices through the end of 2003, Nachmany is projecting that stock and balanced fund inflows could possibly exceed $200 billion for the year.
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