Investors retreat from stock mutual funds in March

AP News
Posted: Apr 11, 2012 4:58 PM
Investors retreat from stock mutual funds in March

A rising market didn't instill confidence in March, as investors withdrew more from stock mutual funds than they deposited into them. It marked a shift from January and February, when stock funds finally began to attract small amounts of cash.

Investors withdrew a net $7.5 billion from U.S. stock funds in March, industry consultant Strategic Insight said Wednesday. That offsets the total $4.5 billion in net deposits that stock funds attracted in January and February.

The increased confidence that investors demonstrated in the winter was partly due to a market rally. The Standard & Poor's 500 index returned 12.6 percent in the first quarter, including dividends.

Yet in March, investors returned to their risk-averse ways of last year. From May through December, withdrawals exceeded deposits each month.

"Investor confidence remains fragile," said Avi Nachmany, research director with New York-based Strategic Insight. "The optimism on Wall Street has yet to reach Main Street."

Nachmany said investors are likely to remain cautious as they confront economic worries and rising gasoline prices.

Indeed, bond funds continue to attract cash, suggesting investors remain nervous about stock volatility three years after the market hit bottom in the Great Recession. Last month, net deposits into bond funds totaled nearly $16 billion.

Here are additional details about how investors moved their money in March, according to Strategic Insight:

_ Foreign stock funds: Investors deposited a net $5.2 billion, the third consecutive month that flows have been positive. Investors pulled cash from foreign funds from October through December, amid fears that the European debt crisis might spin out of control. Those concerns have eased this year.

_ Bond funds: March's total $15.6 billion of net deposits into bond funds included $12 billion into taxable bond funds, which primarily invest in corporate bonds. An additional $3.6 billion was deposited into municipal bond funds, which invest in bonds issued by state and local governments. Through the first three months of the year, bond funds have attracted about $84 billion in cash, compared with $116 billion during all of 2011.

_ Money-market funds: A net $69 billion was withdrawn from these funds last month, compared with $3 billion that flowed out in February. Money-market funds are designed to be safe harbors where investors can temporarily park cash and quickly access it when needed. However, their appeal has been reduced because returns have been barely above zero _ they're now averaging 0.03 percent _ for about three years. Money fund returns are closely tied to interest rates. Prospects of higher returns dimmed in January when the Federal Reserve said it doesn't expect to raise its benchmark rate until late 2014, at the earliest, because the economic recovery remains fragile.

_ Exchange-traded funds: Investors deposited a net $10 billion into ETFs, which bundle together investments in a particular market index. Over the first three months of the year, net deposits total $53 billion, easily putting ETFs on track to record a sixth consecutive year of attracting more than $100 billion in new cash. Unlike mutual funds, ETFs can be traded during daily sessions just like stocks. ETFs continue to grow much faster than mutual funds, with net deposits totaling $115 billion last year.