Investors hungrier for stock funds, but finicky

 By Stan Choe

AP Business Writer
NEW YORK (AP) — Investors are giving stock mutual funds another shot after getting burned during the financial crisis, but they’re being choosy.
From January through August, eight straight months, investors put more money into stock funds than they pulled out, according to the most recent data from the Investment Company Institute. They invested a net total of $106.5 billion, which is more than IBM’s revenue for all of last year. It marks a sharp turnaround: Investors had yanked more from stock funds than they put in for 19 of the 20 preceding months, withdrawing a net total of $320.4 billion.

Some analysts earlier this year were predicting a “Great Rotation,” in which investors would migrate en masse from bonds into stocks. The thinking was that investors would get tired of low bond interest rates and would fear that their bond funds would lose money when interest rates rose. Instead, they’d switch over to stocks, which have continued to surge. But memories of the painful losses suffered by stock funds in 2008 and early 2009 linger. So although investor interest in stock funds has increased in 2013, it’s been only for certain kinds.

Some of that sting has investors looking abroad. Of the money taken in by stock funds this year, 86 percent went to world stock mutual funds. They’re drawing interest in part because Japan has been one of the world’s best markets. Expectations for its economy have improved following a big push of stimulus by the Bank of Japan, and the Nikkei 225 index’s 36.2 percent rise this year is nearly double the 17.7 percent gain for the Standard & Poor’s 500 index. Europe’s economy has also finally begun growing again, following six quarters of contraction.

Among U.S. stock mutual funds, investors have been more discriminating. A look at which types have been winners and losers:

These funds aren’t afraid to buy a stock when it’s down. Value managers look for stocks in which they believe the market’s expectations are too low. That may be due to an earnings setback or some other challenge. After buying a cheap stock, value funds are content to wait for the price to rise as expectations reset over time.
These funds have been popular: Large-cap value stock funds have attracted $7 billion in net new investment through the first eight months of 2013, according to Morningstar.
One big attraction is the dividends that value stock funds tend to pay, says Michael Rawson, fund analyst at Morningstar. Low bond yields meant many investors turned to dividend stocks for income, particularly
early in the year, Rawson says.

The dollars are flowing into value funds, though, when value managers say they’re finding fewer stocks worth buying. “We’ve gotten to a point where stock prices are probably fair at best, and there just aren’t that many bargains out there,” says Brad Hinton, director of research at Weitz Funds.

The Weitz Partners Value fund has been comfortable holding on to cash in the meantime, waiting for prices to drop for stocks that it likes.

Companies whose revenue and earnings are rising more quickly than the rest of the market are the main staple of growth funds. Think of or Google.
Investors are still leery: They yanked a net $17.7 billion out of large-cap growth stock funds through August, according to Morningstar. In August alone, they withdrew a net $3.2 billion.

Growth stocks can be risky. They’re often more expensive than the rest of the market, as measured by their prices relative to their earnings. During the dot-com boom, investors bid up technology and other growth stocks on expectations that the Internet would fuel tremendous earnings growth. But when the bubble burst in 2000, growth stocks in the Russell 3000 index lost 22.4 percent. That same year, value stocks returned 8 percent. The Russell 3000 covers 98 percent of the U.S. stock market.

Managers of growth stock funds argue that this is a good time for them. The global economic recovery has been tepid, with lackluster job growth in the U.S. and worries rising about a slowdown in emerging markets. That means companies able to deliver strong earnings growth are becoming more rare. Such scarcity means investors will be willing to pay even more for growth, says Ryan Crane, chief investment officer of Stephens Investment Management Group.

Blend stock funds invest in a mix of both value and growth stocks, and they have been the most popular this year. Large-cap blend funds have attracted a net $14.9 billion, according to Morningstar.
Much of that is due to a rising interest in index mutual funds. These funds keep it simple by trying only to mimic stock indexes, rather than trying to beat them. The most popular fund in August based on net investment was Vanguard’s Total Stock Market Index fun. It drew $2.3 billion and now has $272.9 billion in assets. In June, the most popular fund was a Vanguard index fund that tracks foreign stocks.
Index funds are cheaper to own than actively managed funds. They also have performed better recently: Over the last five years, 79 percent of all large-cap stock funds have failed to keep up with the S&P 500, according to S&P Dow Jones Indices.