Funds Post Modest Inflows, As Investors Remain Wary

A mid-month rally on Wall Street prompted investors to sock a net $3 billion into mutual funds in October, but the gains were largely dismissed as modest. Analysts suspect investors will continue to shy away from equities for months to come, according to a report issued last week by New York research firm Lipper.

The $3 billion gain "is a very weak number historically for such a big-rally period," said Lipper Senior Analyst Don Cassidy during a radio program last Thursday. "But at least it was a plus sign after four consecutive months" of outflows.

The inflows were driven primarily by the best one-month gain on the Dow Jones Industrial Average since January of 1987. Still, investors, who are weathering the longest bear market in 60 years, have been draining assets from funds for months. In July, for example, stock funds suffered record outflows of $52.6 billion, and analysts said October's market gains were simply not enough to lure investors back.

"We're in a period of investor doubt and great external uncertainty," Cassidy said. People have been hurt for 30-plus months on their stocks and equity funds, and they have seen rallies before, only to find out that they were just corrections in a bear market."

As a result, Cassidy said that "investors took a show me' stance last month, effectively asking the market to prove that it was finished melting down. In terms of time lapsed, which weighs heavily on emotions, fund investors are literally in uncharted territory now. Thus, their very cautious response to the major October rally is understandable."

However, Cassidy said that most investors continued to hold their funds and resisted the urge to sell, but there was probably profit taking by some investors.

International funds posted gains of about $1 billion in October, following modest inflows in September. Income funds gained nearly $1.2 billion, which analysts attributed to caution among investors about equity investing. And mid-cap core funds, relatively strong performers in recent months, garnered $1 billion in assets, Lipper said.

Investors, meanwhile, cooled on balanced and real estate funds, which have been favorites this year. Balanced funds garnered a net $200 million, compared to $700 million in September. The cooled-down curiosity was the result of concerns about interest rate increases, analysts said. Real estate funds, meanwhile, suffered net outflows for the first time since November of last year. Those funds shed $100 million in assets, largely because their performance dipped to negative 4%, Lipper said.

Science and technology funds had modest inflows after losing $6.6 billion during a continuous string of negative months that began in February. And telecommunications funds garnered less than $50 million, their second month of inflows in 23 months. The two sectors drove the market's rebound in October, Lipper said.

Utility funds, meanwhile, lost $200 million in assets. Those funds now maintain the longest losing streak of any sector, with outflows continuing during the past 22 months.

Bond funds garnered $6.5 billion in October. The funds have proved remarkably popular, attracting a total of $120 billion during the past 10 months, as investors continue to shy away from equities. But interest-rate concerns have also squelched interest in bond funds, Lipper said, and kept flows at their lowest level since March.

Money market funds, meanwhile, attracted roughly $9 billion during October, Lipper said. It was only the fourth month that the products have garnered inflows during the past 11 months. In addition, inflows for the month of October have averaged more than $45 billion during the past three years, leading analysts to conclude that October historically has been a good seasonal month for money market products.

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