Mutual Funds Are Flush With Cash
Today's low rates on CDs have pushed income investors into mutuals to prop up returns
EQUITY mutual funds - aided by unattractive yields on bank certificates of deposit and money market funds - have become the vehicles of choice for many United States investors.
Investors are pouring money into stock funds in "record" amounts, says John Collins, an official of the Investment Company Institute, Washington. The ICI is the main trade arm of the US mutual fund industry.
The current large inflows into equity funds continue a pattern from the past year, Mr. Collins says. "Last year was our strongest year ever for net sales of equity funds, that is total sales minus redemptions." Some $78 billion of new money poured into equity funds, slightly more than double the $38 billion that poured into equity funds in the prior record year, 1991.
Moreover, the final two months of 1992 were especially bullish for the nation's 1,357 equity funds. Net sales of equity funds in November of 1992 reached a record $9.9 billion; in December, net sales were the second highest on record, $9.2 billion.
Industry observers estimate that net sales last month were at least in the $9 billion range, and possibly more than $10 billion.
"This particular market environment that we're seeing goes back to last October," says Michael Hines, senior vice president of marketing at Fidelity Investments, Boston. Fidelity is the nation's largest family of mutual funds in terms of total assets. Big sales in growth funds
The greatest sales are occurring for growth funds, and income/growth funds, Mr. Hines says, which are two types of stock funds that are generally considered "conservative" in that they attempt to avoid many of the market gyrations associated with sudden shifts in interest rates or national economic policy.
For 1992, ICI notes that investors poured $14 billion into aggressive growth funds, compared to $9 billion in 1991; aggressive growth funds are considered riskier than either growth, or income/growth funds.
Growth funds, according to ICI's Collins, had inflows of $25 billion last year, up from $14 billion in 1991. And income/growth funds - where the objective is to have the value of the common stock appreciate while investors also realize a steady stream of dividends - jumped to $26 billion in net sales, compared to $11 billion in 1991.
Money-market funds had been the second largest category of mutual funds for many years next to bond funds. However, at the end of 1992, the total value of equity funds exceeded taxable money market funds - $477 billion for the equity funds, compared to $453 billion for money funds. With interest rates stuck in the 3 percent range, equity funds are expected to remain out in front of money funds.
Some equity fund officials fret that adverse developments in the stock market, or the US economy, could send stock funds into a tailspin. That happened back in 1988, following the stock market crash of October 1987. In 1988 stock funds posted a net outflow - i.e., redemptions over sales - of $16 billion.
The flash point for rapid redemptions would presumably be a sharp stock market correction. Such a downturn cannot be totally ruled out, experts warn, given the speculative run up in recent months in the Nasdaq over-the-counter market, which includes many smaller stocks.
The Nasdaq composite is up 20 percent in the past six months, compared to a decline of 2 percent for the Dow industrials, with its large blue-chip companies. Technicians see correction
Many market "technicians" - the financial analysts who do the number crunching on day-to-day price movements in the markets - now say that some type of correction is likely. But the majority view is probably similar to that of William Raftery, of Smith, Barney, Harris Upham & Co., who says that a correction "will be in the 5 percent to 10 percent range," not enough to do too much harm to the equities market in general.
After a correction, Mr. Raftery says, "the market should quickly resume" its upward course.
Meantime, the larger families of mutual funds are stressing the transferability feature of their funds; investors - with just a quick telephone call - can shift funds out of equity funds into other types of funds.