Mutual fund trades signal uncertainty in wider market

The Insider

Your Money

April 17, 2005|By BILL BARNHART

Stock investors who try to time the market - buy low and sell high in short intervals - often track mutual fund cash flows as a market signal.

They face a chicken-and-egg problem: Does cash flow into and out of mutual funds influence stock prices, or do stock prices influence fund flows?

Either way, the chicken seems to be winning.

"Self-confidence is way down," said Donald Cassidy, senior research analyst at mutual fund tracker Lipper.

The lingering hurt of the Nasdaq bust continues to make investors gun-shy, especially about U.S. equities.

International funds, seen as a bet against the dollar, and energy sector funds have thrived.

But cash flow into large-capitalization stock equity funds declined in February, despite a rally in the blue chips.

The Standard & Poor's 500 index returned nearly 7 percent in the 12 months that ended March 31.

But cash flow into equity funds in that period slumped to the worst level since a 12-month period ending in November 2003, estimates Stone & McCarthy Research Associates.

On the flip side, fixed-income funds attracted net new cash in February, despite losses in the fixed-income market.

For several years, the steadiest growth in the mutual fund industry has been in so-called hybrid funds, which combine stocks, fixed-income and other securities to achieve a conservative balance.

"Hybrid used to be nothing, a footnote," said Carl Wittnebert, research director at TrimTabs Investment Research.

Hybrid funds, which include newly popular asset allocation funds and traditional stock/bond balanced funds, appeal to an increasing number of investors who do not believe they can make tactical decisions wisely.

"There is money to be invested, so why not use more conservative hybrid funds," Wittnebert said.

Meanwhile, cash flow into sector funds and focused funds, which place big bets on a few stocks, has declined as a percentage of equity and hybrid fund flows, said Cassidy.

Sector and focused funds favored these days are literally grounded in real assets - real estate and energy - as opposed to the more intangible technology and telecommunications stocks popular in the 1990s, he said.

It's not just different choices. The rate of switching among funds, formerly driven by the news, is down, even from its previous low level, said Lori Lucas, director of participant research at Hewitt Associates in Lincolnshire, Ill.

Greater employee reluctance to micromanage their portfolios is evident in data from 401(k) retirement savings at major employers tracked by Hewitt.

Fixed-income funds, especially stable-value funds that pay higher rates than money funds, are beating stocks in the 401(k) fund-switching derby, Lucas said.

But "people are more likely now to be saying, `I'm not sure whether it's a good idea to be moving my asset allocation one way or the other,' " she said.

Mutual funds have placed restrictions on trading in and out of their funds. But the data show "people not being confident about which direction to take in the market," Lucas said.

The market signal from mutual fund cash flows these days is a big yellow flag.

Bill Barnhart is a columnist for the Chicago Tribune, a Tribune Co. newspaper. E-mail him at

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