Investors' increasing appetite for ETFs and alternative investments is sapping money from stock funds — a trend that some say could last for several years.
Investors' increasing appetite for ETFs and alternative investments is sapping money from stock funds — a trend that some say could last for several years.
Net flows into stock funds are averaging about $11 billion a month, according to Lipper Inc., a New York-based fund tracker. While that is up significantly from about $5 billion a month in the early 1990s, it is down from a peak of more than $50 billion reached in January 2000, according to Lipper.
New cash making its way into stock funds has fallen to a level not seen since 1994, according to Lipper.
Mutual funds that invest in U.S. companies appear to be taking the biggest hit.
Net flows into U.S. stock funds are hovering at about zero dollars a month, on average, according to Lipper. In other words, investors are yanking as much money from the funds as they are pushing in.
Even more troubling, however, is the fact that flows into U.S. stock funds haven't tracked the major indexes since January 2004, according to Lipper. Before that, flows tended to move in tandem with the ups and downs of the Dow Jones Industrial Average, the Standard & Poor's 500 stock index and the Nasdaq Composite Index.
“It's very puzzling,” said Andrew Clark, head of research for the Americas at Lipper. “Something major has happened here.”
An underlying theme of the data is increased competition, said Christine Benz, director of mutual fund analysis at Morningstar Inc. of Chicago
“I think one thing we are seeing is that the spoils are going to fewer and fewer firms,” she said. “You are competing with other mutual fund companies and purveyors of other investment vehicles; it's not good to be adequate anymore.”
Tom Roseen a senior research analyst at Lipper, and Mr. Clark tracked the trend in a recent study that analyzes flows into mutual funds between 1984 and June of this year.
To be sure, not all stock funds are finding net flows difficult to come by.
About $12 billion a month is going into world stock funds, according to Mr. Clark and Mr. Roseen. Mixed-equity funds, including life cycle funds, are also experiencing healthy inflows, they said.
Then there are exchange traded funds. It is no coincidence that the decline in net flows into stock funds coincides with the rise of ETFs, according to the Lipper analysts.
While Mr. Clark and Mr. Roseen are convinced that net flows into stock funds could be weak for years to come, not everyone agrees.
“I think it's a short-term blip that eventually will right itself,” said Chuck Gibson, president of Financial Perspectives of Newark, Calif.
He cited the growing interest in international funds, ETFs and life cycle funds as the reason for the decline of interest in stock funds.
Taking money to purchase a house could be another factor, Mr. Gibson said, noting that he has seen a significant amount of dollars being moved in order to buy homes.
Performance chasing may also be behind the shift, said F. John Deyeso, a financial planner with financial filosophy of New York.
“Some investors are decreasing their domestic and increasing their international exposures,” he added.
For its part, the mutual fund industry isn't worried about declining flows into stock funds — at least not publicly.
Overall, mutual funds are experiencing strong net inflows, said Brian Reid, chief economist at the Investment Company Institute of Washington.
Net inflows into stock, bond, balanced and hybrid funds totaled $208 billion year-to-date through July, compared with $138 billion during the corresponding period a year earlier, according to Mr. Reid.
While net flows into domestic-stock funds are “soft,” Mr. Reid said, “this is part of a cycle of asset reallocation that could last for a couple of years.”
Most firms have product lines in all areas, he said. For smaller, less diverse companies, the shift in flows could be more problematic, Mr. Reid added.
Some fund managers think that some of the products out there might not retain their level of popularity over the long term.
Both international and life cycle funds are more popular among investors, said Neil Hennessy, president, chairman and chief executive of Hennessy Advisors Inc. of Novato, Calif., which has $1.7 billion in assets under management.
“Right now, it's a trend. It all depends on how the money is being managed,” Mr. Hennessy said.
Life cycle funds will lose their luster at some point in time, he said.
“There has been a large asset allocation shift away from large U.S. equities and into private equity, hedge and alternatives in general, and international,” said Patrick Becker Jr., vice president and portfolio manager at Becker Capital Management Inc. The Portland, Ore., firm has $2.5 billion in assets under management.
Shifting money into hedge funds is another trend that won't last, Mr. Becker said.
“The returns you've seen out of private equity will be less going forward,” he said. “There is so much competition.”
Sue Asci can be reached at sasci@crain.com.
