Speculation Blues

Investors Shy Away from Stock Funds in 2001 Despite Record Mutual Fund Inflows

Speculation Blues

Mutual funds enjoyed a banner year for inflows in 2001, taking in $434.5 billion last year, according to estimates from fund-tracker Lipper. However, just $33.6 billion of that flowed into equity mutual funds as investors shunned a stock market that posted dreary year-end returns for the major indexes.

2001: A yearlong hangover
Index
2001 year-end returns
S&P 500
-11.88%
Nasdaq-100 (QQQ)
-33.34%
Wilshire 5000
-10.89%
Dow (Diamonds)
-4.88%
Russell 2000
2.49%

Source: Morningstar, data as of the end of 2001

Although most investors didn't yank cash out of their stock funds in 2001, inflows decreased considerably from the $309.4 billion shoveled into stock funds in 2000.

So where did the money go in 2001? Money market funds took the lion's share of assets - about $325.3 billion. Bond funds raked in $75.6 billion, according to Lipper.

At the end of 2001, nearly $3.31 trillion was invested in stock funds, down from $3.65 trillion in 2000. The highest year-end total for stock funds was at the crest of the bull market in 1999, when they held about $4.04 trillion in assets, according to the Investment Company Institute (ICI), the mutual fund industry's trade group.

Fund assets in the 1990s: America falls in love with stock mutual funds
 
Type of fund (assets in billions of dollars)          
Year
Equity
Hybrid
Bond
Money market*
Total
1990
239.5
36.1
291.3
498.3
1,065.2
1991
404.7
52.2
393.8
542.5
1,393.2
1992
514.1
78.0
504.2
546.2
1,642.5
1993
740.7
144.6
619.5
565.3
2,070.0
1994
852.8
164.5
527.2
611.1
2,155.4
1995
1,249.1
210.5
598.9
753.0
2,811.5
1996
1,726.1
252.9
645.4
901.8
3,526.3
1997
2,368.0
317.1
724.2
1,058.9
4,468.2
1998
2,978.2
364.7
830.6
1,351.7
5,525.2
1999
4,041.9
383.2
808.1
1,613.1
6,846.3
2000
3,962.3
349.7
808.0
1,845.3
6,965.2

*combines taxable and tax-exempt funds          Source: Investment Company Institute

Although there are no hard numbers available yet, Morningstar fund analyst Scott Cooley says anecdotal reports indicate that equity fund inflows have been strong thus far in 2002. He notes that investors haven't stampeded out of stock funds, but as always they are apt to chase performance.

"In the late 1990s, there was a lot of hand-wringing suggesting that fund shareholders would bolt at the first sign of a bear market. That hasn't been the case," said Cooley. "That said, some folks apparently suspended their contributions to equity funds at times in 2001, and there's a substantial minority of investors who consistently chase recent performance. I think that's one reason cash flows have apparently picked up thus far in 2002: Some investors realized there was a rally in the fourth quarter, and they've decided they don't want to miss out on the action."

ETF asset growth breakdown in 2001

The ICI just released data on U.S. exchange-traded fund (ETF) asset growth during 2001. At year's end, there were 102 ETFs trading in the States based on domestic and international benchmarks.

U.S-based ETF asset growth by month since September 2000
Year
Month
Broad-based
Sector/Industry
Global/International
Total
2000
Sep
42,889
4,903
1,909
49,701
 
Oct
49,511
5,135
1,900
56,546
 
Nov
49,662
4,817
1,869
56,348
 
Dec
58,190
5,355
2,041
65,585
2001
Jan
63,801
6,299
2,034
72,134
 
Feb
56,879
5,549
1,915
64,343
 
Mar
58,799
5,407
1,800
66,006
 
Apr
64,717
6,696
1,917
73,330
 
May
63,763
7,091
1,919
72,773
 
Jun
66,921
6,721
1,917
75,560
 
Jul
67,028
6,650
1,842
75,520
 
Aug
63,248
6,747
2,090
72,085
 
Sep
56,218
6,183
1,944
64,345
 
Oct
60,464
6,709
2,248
69,421
 
Nov
68,523
7,742
2,581
78,846
 
Dec
71,774
8,202
3,016
82,993

*assets in millions of dollars            Source: Investment Company Institute

The total number of global ETFs trading will increase to 206 tomorrow with the introduction of IndexChange AG's newest ETF. The new fund is based on the FTSE 100 index and will trade on the Deutsche Bourse with an expense ratio of 0.50%.

It's good to be good, relatively speaking

The most recognized benchmark for socially responsible investing, the Domini 400 Social Index, held its own against the S&P 500 in 2001. The DSI 400 fell 12.07% in 2001, while the S&P 500 shed 11.88% of its value. The Domini Social Equity Fund, launched in 1991, is an index fund tied to the DSI 400. Other large socially responsible index funds include Summit's Total Social Impact Fund and the Calvert Social Equity Fund. Vanguard also offers an index fund tied to the Calvert Social Index of large- and mid-capitalization companies that meet certain social and environmental criteria.

Designed for investors with a conscience, the DSI 400 excludes companies involved in alcohol, tobacco, gambling, nuclear power, and military weapons. KLD Research & Analytics, which maintains the index, also looks at how companies treat their employees and the environment.

The DSI 400 has managed to edge out the S&P 500 during much of the 1990s due to a relative overweighting in technology.

Holier than thou
Index
5 yr. annualized ret.
10 yr. annualized ret.
DSI 400
11.77%
13.77%
S&P 500
10.70%
12.95%

*data as of the end of 2001

Obviously, the technology sector's woes have dragged the index down since the bubble burst. However, the tech rally in the last quarter of 2001 helped keep the benchmark respectable when compared to the S&P 500.