Stock funds approach biggest withdrawals ever

Spooked by a severe market slump and the first downgrade of US credit, investors are on pace to redeem record amounts.

By TheStreet Staff Aug 12, 2011 9:57AM

the streetBy Frank Byrt, TheStreet


U.S. stock mutual funds are forecast to set a record for investor withdrawals in August as Americans recoil from the biggest equity market slump in three years and the first downgrade of Treasurys.


The prediction, from analyst Kevin McDevitt at mutual fund tracker Morningstar, comes after July's $22.9 billion in outflows, the most since the peak of the credit crisis in October 2008, when investors pulled $28 billion from U.S. stock funds. "With August off to a very rocky start, this trend is sure to continue, with deeper outflows to come."


Investors have withdrawn a net $200 billion from U.S. stock mutual funds over the past five years. Total fund industry assets peaked at $4 trillion in late 2007, but the subsequent stock market crash a year later, the prolonged recession and last year's flash crash have contributed to skittish investor behavior that has resulted in outflows of about $500 billion since the peak, according to Morningstar.


That's roughly equivalent to the assets of the seven largest U.S. mutual funds, a list that includes Pimco Total Return (PTTRX), SPDR S&P 500 ETF (SPY) and Fidelity Contrafund (FCNTX).


Outflows in June and July came even though most diversified U.S. stock funds declined an average of only 6% in the three months through July, so it wasn't the market performance that drove investors away.


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"It's taken less and less to spook investors over the years," McDevitt said, and the prospect of the threat of the U.S. defaulting on its debts, which began to gain credence at the end of July because Congress couldn't agree on a debt ceiling, was enough for many of them to throw in the towel.


"Investors' tolerance for uncertainty and risk has really changed," he said, and most of the money that has been coming out of U.S. stock funds won't be coming back, he said.


In previous stampedes out of U.S. stock funds, investors slowly returned, but McDevitt said it could be different this time because there have been a series of "structural shocks" to the financial industry that are not cyclical in nature, as in previous downturns that came with a bear market or a technology stock bubble, as seen early this decade.


"The implications are serious" for mutual funds, he said.


The same investors don't put much trust in U.S. money market funds either -- usually considered a safe place to park cash -- as they are down $223 billion this year. Investors are opting instead for bank savings accounts or certificates of deposit, despite the paltry rate of interest they pay, because of the safety and liquidity.


Still others are investing in U.S. Treasurys and foreign bonds, while some with a higher tolerance for risk are investing in international equity funds.

Those investors eschewing money market funds, once considered one of the safest havens in a period of volatility, likely remember the liquidity crisis of fall 2008. At the time, some money market funds struggled to maintain their $1 net asset value.


The big winner this year has been taxable bond funds, which saw $102 billion in inflows through July, putting the sector on pace with last year's increase of $217 billion.

Aug 12, 2011 11:13AM
"Investors' tolerance for uncertainty and risk has really changed...."
In some cases that may be true. But I think many more investors have come to realize that the markets are driven almost purely by emotion, with no regard to the actual health of the economy, and that the markets are being manipulated by a small group of insiders who are benefiting from the volatility at the expense of the rest of us. The average investor can't engage in "fast trading" or "program trading," and ends up getting screwed time and time again.

One day, it's "Greek debt!!!!" The next day, something else - apparently the "Greek debt" problem got cured, and is now forgotten. Until next week, that is, when it is once again cited as the reason for the markets to start swooning again. After enough of these "nonsense" cycles, investors begin to catch on.
Aug 12, 2011 12:33PM
Millions are pulling out of mutual funds?  You know what that means, my fellow smart's time to pump money into stock funds.  "Buy fear, sell greed."
Aug 12, 2011 1:23PM
Markets have always been driven by emotion. Investors do the same thing over and over. We are creatures of habit. That's why the elliott wave indicator works. And has for 80 years. In April it signaled to get out.
Aug 12, 2011 6:16PM
Buy high, sell low.  Yep, the herd is doing it again.  So predictable.  So stupid.
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