Money Market Flows Prompts 2003 Fund Exodus

March 29, 2004 ( - A flight from money market mutual funds into bank deposits and other targets because of low interest rates helped drive a $43-billion mutual fund outflow during 2003 - the industry's first since 1988.

According to an annual review by the Investment Company Institute (ICI), the fund industry wrapped up an eventful, scandal-plagued 2003 with more than $1 trillion in additional assets (for a $7.4-trillion total). That was just shy of the record $7.5 trillion reached in August 2000.

Not surprisingly, given the late-year equity markets run-up, the amount of assets in equity funds continued to increase over the year with stock funds holding half of all industry assets at year end – up from 42% the year before.

Not only did investors have a greater appetite for stocks, they also continued to pour money into equity index offerings in 2003 to the tune of $29 billion, ICI said. Some $12 billion of that went directly into S&P 500 index funds. Investors were clearly attracted by costs; the S&P Index funds with expense ratios under 0.40% pulled in nearly all of the index inflows. In general, 64% of net stock cash flows went to offerings with expense ratios below 1% while 60% of assets were being held in share classes with expense ratios below 1%, according to the ICI study.

The ICI said it was significant to note that the continuing federal/state industry investigation into market timing and late trading abuses hasn’t turned off investors to funds as investment vehicles. For example, the monthly average inflow of $18.2 billion was slightly ahead of the $17.9 billion inflow that was the monthly average over the first eight months of 2003 before the probe was first announced. The report acknowledges, however, that fund companies named in the investigation did see billion in assets flee to the exits during the period.

Finally, ICI reported that overall fund redemptions – including exchange redemptions – declined sharply as a percentage of average assets in stock funds. ICI said this development reflected a slowdown in redemptions at both international and domestic stock funds.

The report is available at .