December Down Month For Equity, Money Market Fund Inflows

As December drew to a close, money market funds recorded the largest pounding, losing $37.2 billion, followed by equity funds recording an outflow of $5.5 billion.   However, as has been the case in 2002, bond funds enjoyed greater success, posting an inflow of $4.2 billion, according to data by Lipper, Inc.

For the year, equity funds recorded six outflow months in the last seven and finished with their first net outflows since 1988. Money funds also recorded net outflows for 2002. Bond funds amassed their greatest net inflows for any year, breaking the old record of $120 billion set in 1986.

Equity Losses

December proved to be a dreary month for equity investors.   After briefly becoming net buyers of equity funds in November, investors again became net sellers. Net outflows for December, at an estimated $5.5 billion, were nearly as large as November’s inflows had been.   Overall, 2002 brought a third consecutive annual decline in equities, the longest such streak since 1939-41.

Among major clusters of equity types, only mixed-equity funds had inflows, netting $2.4 billion on strength in income (up $1.3 billion) and balanced (up $0.5 billion) gains. Specialty equity funds, which include bear portfolios, also added $0.5 billion.

However, the holiday blues were detected in most other major areas:

• US Diversified Equity down $4.9 billion
• World Equity down $1.7billion
• Sector funds down $1.4 billion.

The world seemed to be in agreement in December as every region and nation in World Equity showed a net outflow, with Global posting a $0.6 billion outflow and International down $0.5 billion seeing the largest dollar amounts depart.

Not much safety was found in the sectors either, with only Gold’s $200 million gain and Natural Resources nearly $100 million positive number showing inflows. Science & Technology and Health/Biotechnology funds had the greatest dollar runoffs down $0.7 billion and $0.4 billion, respectively.  

Telecommunications funds led the outflows in percentage terms, leaking about 4.8% of November 30 assets. Conversely, gold funds had the Midas touch with over 7% in net new money, as investors reacted to the weakening dollar, an upside price breakout in the metal, and a large military buildup near Iraq.

Bond, Record Bonds

Investors  continued plowing money into bond funds while draining it from equities. Net additions in bond funds were $4.2 billion, the smallest of the year, but large enough to secure the bond inflow title for 2002.

Total inflows for year 2002 exceeded $130 billion, handily breaking the old record established in 1986. December also saw the familiar patterns of caution regarding principal risk. Investors focused about 85% of their net buying in short- and intermediate-maturity funds and also leaned heavily towards quality. Short and Intermediate Investment-Grade Bond funds took in $3.2 billion and other types broke even on balance.

Money Was Blue

December is not an especially strong month for flows in money funds, as estimated-tax payments and probably holiday expenses took their toll. The average net flow for the prior three years had been on the plus side by $6 billion, and this December saw an outflow of $37.2 billion. Of course, interest returns on these funds are hovering around record lows of about 0.75%, so investors looking for return more than liquidity continue to move to the banks or to short-maturity bond funds.

Netting out all the various influences and constituencies, money funds had a net outflow of nearly $50 billion for the year. That negative sign was the first since back-to-back outflows in 1992-93 that totaled $30 billion.

Auld Lang Syne

Looking ahead to 2003, Lipper projects net equity fund inflows topping $50 billion. Except for 2001 and 2002, that would still represent the smallest asset inflow for equity funds since 1991.

Additionally, the firm anticipates bond-fund flows as positive but well below the 2002 record. The major factor driving this difference will be the probable absence of a plummeting stock market, which in 2001 and 2002 sent scared money piling into bond funds. About $77 billion, or more than half the year’s total, flowed into bond funds during the panicky period from June through October. Otherwise, flows averaged about $5 billion per month. Thus, Lipper has offered a ballpark estimate of $50 to $70 billion of inflows for 2003.