Funds Flee Stock Funds in July

According to mutual fund research firm Lipper Inc., July’s gusher of outflows was the greatest since the $30 billion in September 2001 when the country was gripped in a fear of terrorism and a summer selloff.

Not only did equity investors continue galloping for the doors in July, they kept heading for the perceived safe haven of fixed income. The Lipper report said that July’s $19.2 billion in fixed income inflow bested everything since August 2001 when bonds took in $15.4 billion.

“This was classic crowd behavior, probably marking a significant market bottom,” Lipper
senior research analyst Don Cassidy said in a statement. “The pain and the fear became unbearable and several million investors gave up at virtually the same time, just as the selling climax in stocks that ended the morning of July 24 showed.”

Marginal Industry Flows

All told, Lipper said July was yet another among several recent months when the funds industry as a whole had either minimally positive or actually negative total net flows.

The equity-fund outflows in June and July have nearly equaled inflows in the first five months of 2000, and July alone exceeded the net inflow of about $34 billion for all of 2001.

US Diversified Equity funds, which comprise about 61% of total equity-fund assets at $1.63 billion, accounted for their usual lions’ share of the net stock fund outflows, as some $35.6 billion was withdrawn.

Several specific patterns reflected the indiscriminate selling in equity funds. Even types that provide above-average downside price protection were tossed overboard.

Balanced funds suffered a $3 billion loss, and Equity Income funds $1.1 billion. Among sector funds, $1 billion-plus outflows hit both the beleaguered Science & Technology funds group and the recently hammered Health/Biotechnology funds; only Real Estate (mainly REIT-holding) funds had a tiny net inflow – about $10 million.

These funds have received strong inflows consistently as the more speculative parts of the stock market declined since March 2000 – and even REIT shares were tossed out for two violent weeks in July. But the “just sell it” mentality was nowhere more evident than in US Diversified Equity funds.

Bond-fund net flows have been the steady bright spot, being positive for all but one of the past 19 months and now for 15 months running. Money funds’ flows, which were strong last year, have been weak in 2002 due to low returns in competition with bank CDs.