Investors leaving long-term bond funds

October 30, 1992|By New York Times News Service

NEW YORK -- A growing number of mutual fund investors are moving away from long-term bond funds, evidently fearing lower bond prices that could be brought on by higher interest rates, some mutual fund companies said yesterday. The investors seem to be shifting into stock mutual funds and money market funds.

The drift from longer-term bond funds is by no means a rout, and some fund groups said their bond funds continued to pull in investor money. But it nonetheless signaled investor caution, which no doubt was brought about by rising interest rates and falling bond prices earlier this month. If the drift continues, it could help to push interest rates even higher.

The statements about October sales came as the Investment Company Institute reported a slowing of cash flowing into bond funds in September, although they still took in $8 billion.

Bond funds have benefited from huge investments by people disappointed by low interest rates paid by banks, and some money continues to come from such investors.

But many fund groups voiced disappointment at the amount now coming in, and others said the inflow was not enough to offset the withdrawals from bond funds by existing investors. For the industry as a whole, bond funds have not seen a net outflow of cash in any month since April 1990, and it appears unlikely that that happened this month.

One fund category that did see large withdrawals was junk-bond funds. At Vanguard Investments, a spokesman, Brian Mattes, said about $550 million was withdrawn -- a quarter of the assets in what had been a $2.2 billion fund.

Michael Hines, a vice president of Fidelity Investments, the nation's largest mutual fund company, said that while withdrawals were strongest in junk funds, there was a net withdrawal from other types of Fidelity bond funds as well.

There was much less activity in the funds that are sold through brokers and insurance agents, but some of them also reported outflows from bond funds. "We had a net outflow from government bond funds," said John Reilly of Massachusetts Financial Services.

On the other hand, Jon Fossel, the chief executive of Oppenheimer Funds, said bond fund sales continued to be strong. "Our typical investor is probably a little more long-term oriented than a lot of no-load funds," he said.

Bond funds have enjoyed enormous sales this year, as investors have fled from bank certificates of deposit, on which rates dropped sharply earlier this year, and sought higher yields. But CD rates have risen recently, said Bruce Speca of the TNE Fund Group, and some investors "are having second thoughts and saying, 'Maybe I should wait.' "

Mr. Speca said bond funds in his group still took in substantial amounts of money, and Stephen Gibson, an official at the Putnam funds, agreed. But Mr. Gibson added that "it looks to us like a few people are waiting on the sidelines."

The large withdrawals of money from junk funds, reported by several fund groups but not in as large amounts as seen at Vanguard, appear to represent concerns brought on by the slide in values of bonds issued by Marriott Corp. after it announced plans for a corporate reorganization.

In addition, some market timers apparently concluded that the large rise in junk-bond prices may have run its course. The shift came at the end of a strong period in junk sales, capped by September, when a net $779 million came into such funds, the highest for any month since October 1986.

The cash-flow figures include sales and redemptions, as well as the movement of cash among different types of funds. But they do not include reinvested dividends.

The $8 billion that came into bond funds in September was the lowest since April and was down from an inflow of $9.3 billion in August. But that decline was largely because of a $2.2 billion outflow from global bond funds, brought on by the currency turbulence in September.

Stock funds took in $4.5 billion in September, up from $3.5 billion a month earlier, and some fund groups said stock-fund sales had risen this month. Both Fidelity and T. Rowe Price reported growing sales of more aggressive stock funds, as opposed to ones that pick safer stocks less likely to rise rapidly in a bull market.

Overall, long-term funds took in $12.5 billion in September. By historical standards, that is a very good figure. But it is the lowest of any month in 1992 and is almost a third less than July's $18.4 billion.

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