U.S. Stock Funds Have First Withdrawals Before Dow Record

Investors pulled money from mutual funds that buy U.S. stocks for the first week this year, just before the Dow Jones Industrial Average hit a record.

Domestic stock funds experienced redemptions of $1.13 billion in the week ended Feb. 27, according to the Washington- based Investment Company Institute. The funds had won deposits in the previous seven weeks, ICI data show.

Last week’s redemptions underscore investors remain wary of U.S. equities as lawmakers in Washington debate how to trim the federal budget deficit. Domestic stock funds suffered withdrawals in each of the past six years, as fund managers failed to protect clients from losses during the 2007 to 2009 financial crisis. Investors poured $18.56 billion into domestic stocks funds in January, the biggest monthly deposits in nine years, as stocks rallied and the U.S. economy showed signs of strengthening.

“I think we are going to have to wait a few more months before we know what is happening,” Geoff Bobroff, a mutual fund consultant based in East Greenwich, Rhode Island, said in a telephone interview.

Investors started pulling money from U.S. stock funds in 2007, and accelerated withdrawals after a 38 percent decline in the Standard & Poor’s 500 Index (SPX) in 2008. They instead sought out the perceived safety of bond funds, even as the stock market more than doubled from a 12-year low in March 2009.

The Dow rose 0.3 percent to 14,295.09 at 1:53 p.m. in New York, after reaching a record yesterday to surpass its previous peak in October 2007.

Jobs Report

A private jobs report today from ADP Research Institute bolstered optimism that the U.S. job market will keep expanding this year. Employers added 198,000 positions last month, ADP said, topping the median economist forecast for 170,000.

In January, investors added money to both stock and bond funds, a pattern that continued in February, according to ICI data. Funds that buy international stocks have been more popular than their domestic counterparts, with such funds winning $2.18 billion in deposits last week, the ICI said.

“I still think people perceive the international arena as a better growth option,” Greggory Warren, an analyst with Chicago-based Morningstar Inc. (MORN), said in a telephone interview.

Warren said he remains skeptical that investors are ready to return to stocks in a big way. In a Feb. 4 note, he pointed out that in past years, retail investors pulled back from stocks whenever markets declined. “We are not convinced this is the start of a trend,” he wrote.

Bond Risks

Investors still favor bond funds, ignoring warnings that bonds lose value if interest rates rise. Bond funds drew $4.99 billion in the week ended Feb. 27, with taxable fixed-income funds gathering $4.41 billion and those investing in municipal debt getting $579 million.

“I am concerned that the general public doesn’t quite understand the pricing of bonds and interest rates and the inverse correlation between the two,” Goldman Sachs Group Inc. (GS) President Gary D. Cohn said in a Feb. 11 interview on Bloomberg Television.

Dan Fuss, whose Loomis Sayles Bond Fund beat 97 percent of peers in the last three years, said in a January interview that the fixed-income market is more “overbought” that at any time in his 55-year career.

“For heaven’s sake, don’t go out and borrow money to buy bonds right now,” he said.

Concern that investors will shift their allocations to equities from bonds in a so-called great rotation is overblown, DoubleLine Capital Chief Executive Officer Jeffrey Gundlach said yesterday in a webcast organized by his firm.

To contact the reporter on this story: Charles Stein in Boston at cstein4@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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