Cash continues to surge into stock mutual funds

By Mark Jewell
AP Personal Finance Writer

BOSTON (AP) — The newfound confidence that investors showed at the start of the year held up through the end of January, boosting cash flows into stock mutual funds to the highest levels in more than a decade.

By one measure, funds attracted cash at the fastest pace in 17 years. The $34.2 billion of net deposits into stock mutual funds and exchange-traded funds for the four weeks ended Jan. 30 was the largest four-week total since January 1996, according to Lipper.

Other fund researchers also report high levels of cash coming in as stock prices climbed to five-year highs. January was the first time in 11 months that deposits into U.S. stock funds exceeded withdrawals.

That’s led to predictions that stock funds will continue to attract cash in coming months.

“As economic life across America slowly improves, investment in stock funds will increase, too,” says Avi Nachmany, research director with industry consultant Strategic Insight.

If flows continue to be positive, 2013 would be the first year since 2006 that U.S. stock funds have attracted cash, according to Strategic Insight. Nearly $405 billion has been pulled out since the beginning of 2007, the year the stock market hit a historic high.

Investors were encouraged in January by mostly strong fourth-quarter earnings reports, and by the Jan. 1 agreement between Congress and the White House to avert the worst effects of the so-called “fiscal cliff.” The Standard & Poor’s 500 stock index was up 6 percent through Tuesday.

Those and other factors “have helped investors overcome, at least for now, a state of investment anxiety,” Nachmany says.

In the latest weeklong period ended Jan. 30, investors deposited a net $3.5 billion into U.S. stock mutual funds, the Investment Company Institute said Wednesday. That boosted the four-week total flowing into stock funds to $19.6 billion. That’s the largest four-week total since the ICI, an industry trade organization, began tracking flows on a weekly basis in 2007.

Lipper, a unit of Thomson Reuters, said the four-week total of $20.7 billion for U.S. stock mutual funds and foreign stock funds — excluding ETFs — was the largest since April 12, 2000.

While figures covering the final day of January aren’t yet available, Strategic Insight said in a preliminary report that the full-month flow into stock funds was likely to be the largest in nine years. During January, investors deposited a net $51 billion into stock funds and hybrid funds, which invest in a mix of stocks and bonds. That’s the most since $56 billion flowed in during January 2004.

While stock fund flows reached the highest levels in years, investors continued to add to bond mutual funds last month. Those funds attracted $31.6 billion in net deposits during the four weeks ended Jan. 30.

Bonds typically generate smaller long-term returns than stocks, but with less chance of short-term losses. Bond funds last year attracted $317 billion in new cash, another illustration of how conservative investors have become with their money since the financial crisis in 2008.

The strong start for stock fund flows in 2013 suggests investors have regained confidence, but it could prove to be short-lived. For example, investors added cash to stock funds for four months in a row at the start of 2011, after consistently withdrawing money since 2008. But sentiment worsened in the late spring of 2011 as investors digested disappointing news about economic recovery and Europe’s debt crisis. They began pulling cash out again, and net withdrawals from stock funds totaled $82 billion for the full year.

Similarly, stock funds attracted cash in January and February of 2012. But it didn’t last, and net withdrawals totaled $90 billion for the year, the largest since 2008.