Stock Funds Lure Most Cash in 13 Years as Market Rallies

Investors are pouring more money into stock mutual funds in the U.S. than they have in 13 years, attracted by a market near record highs and stung by bond losses that would deepen if interest rates keep rising.

Stock funds won $172 billion in the year’s first 10 months, the largest amount since they got $272 billion in all of 2000, according to Morningstar Inc. (MORN) estimates. Even with most of the cash going to international funds, domestic equity deposits are the highest since 2004.

The move marks a reversal from the four years through 2012, when investors put $1 trillion into fixed income as the financial crisis drove many to redeem from stocks and miss out as the Standard & Poor’s 500 Index almost tripled from its low. Rare losses this year in core bond portfolios, coupled with a 25 percent gain in the S&P 500, spurred the switch back to equities that some professionals call risky performance chasing.

“The timing of retail investors tends to be terrible,” said Jonathan Pond, an independent financial adviser in Newton, Massachusetts, who oversees $200 million. The deposits may be a contrarian indicator of a market near a top, he said.

Jeremy Grantham, chief investment strategist at Boston-based money manager Grantham Mayo Van Otterloo & Co., told clients in a letter this week, “We will have the third in the series of serious market busts since 1999.” BlackRock Inc. Chief Executive Officer Laurence D. Fink said this month that stocks may decline as much as 15 percent because of political risks in China, Japan, France and the U.S.

Equity Allocations

The market run-up has left investors as a group with an unusually high allocation to equities, at 57 percent, said Francis Kinniry, a principal at Valley Forge, Pennsylvania-based Vanguard Group Inc., the world’s largest mutual-fund company.

Equity allocations were higher only twice in the past 20 years, Kinniry said: in the late 1990s leading up to the technology stock crash of 2000, and prior to the 2007-2009 global financial crisis. He based his calculations on the total amounts of money in mutual funds and exchange-traded funds across asset classes at U.S. firms.

People shifting into equities “are jumping from one frying pan to another,” Eric Cinnamond, manager of the $694 million Aston/River Road Independent Value Fund, said in an interview from Louisville, Kentucky.

Intermediate-term bond funds, a category often used for primary fixed-income holdings, declined 0.9 percent in 2013 through Nov. 19, according to Chicago-based Morningstar. Fixed-income funds had net redemptions of $11.2 billion in this year’s first 10 months, the firm estimated.

Statement Shock

Bonds have lost value since Federal Reserve Chairman Ben S. Bernanke in May raised the possibility of the U.S. central bank scaling back its asset-buying program. The yield on the 10-year Treasury note rose to 2.79 percent as of 4:15 p.m. yesterday in New York from 1.93 percent on May 21, the day before Bernanke first mentioned the idea of reducing monetary stimulus. Bond prices fall as rates rise. Pacific Investment Management Co., the biggest manager of bond funds, lost $39 billion to net withdrawals in the third quarter.

“People are rotating into stocks because they opened up their statements and saw losses in their bond funds for the first time in god knows how long,” Michael Mullaney, who oversees $10.7 billion as Boston-based chief investment officer for Fiduciary Trust Co., said in a telephone interview.

Investors added $13.6 billion to stock mutual funds in the week ended Oct. 23, the most since early January, according to the Investment Company Institute, a Washington-based trade group. The $9.2 billion they put into funds that buy U.S. stocks that week was the highest total since weekly records began in 2007.

Bullishness Readings

Sentiment among individual investors grew increasingly positive as the S&P 500 set new highs. Bullishness in the American Association of Individual Investors’ weekly survey has averaged 43 percent this quarter, up from 29 percent in August and a long-term average of 39 percent.

Money managers have noticed the change.

“There is no doubt that people are moving further out the risk curve and it’s manifesting in the equity side of the house,” Henry Herrmann, CEO of Overland, Kansas-based Waddell & Reed Financial Inc. (WDR), said on an Oct. 29 conference call for investors.

Greg Johnson, CEO of San Mateo, California-based Franklin Resources Inc. (BEN), told investors on a conference call last month that he was “encouraged by the improved flows to equity and hybrid strategies,” which saw their strongest deposits in three years. Hybrid funds buy both stocks and bonds.

Even so, some firms say the return to stocks is still modest.

Not 1990s

“It doesn’t feel like the 1990s,” said Douglas Orton, vice president of Boston-based MFS Investment Management (SLF), which oversaw $398 billion as of Oct. 31. In that decade, mutual-fund assets soared from less than $1 trillion to almost $7 trillion, according to the ICI, as rising prices fueled demand from households and retirement savers.

Orton, whose firm regularly surveys individual investors to gauge risk appetites, said 38 percent of respondents to the latest questionnaire, taken in May, called asset growth their top priority, an increase from 30 percent in October 2012 while below the 60 percent level from before the financial crisis.

As a percentage of assets in stock funds, this year’s deposits are on par with those made in 2005 to 2006, Morningstar’s data show.

Past Reversals

Investors returning to stock funds may not be a bearish signal, based on historic patterns. In ICI data going back to 1984, annual mutual-fund flows turned positive twice before: in 1989, preceding market gains in eight of the next 10 years, and in 2003, when the S&P 500 kept rallying until October 2007.

The money hasn’t flowed to all equity-fund managers. Los Angeles-based Capital Group Cos.’ American Funds, the third-largest mutual fund firm in the U.S., had redemptions of $9.4 billion from its equity lineup in the first 10 months of 2013, Morningstar estimates.

Among the beneficiaries, MFS drew $14.5 billion to its stock funds, Chicago-based Harris Associates LP’s Oakmark Funds attracted $13.6 billion and Springfield, Massachusetts-based Massachusetts Mutual Life Insurance Co.’s Oppenheimer Funds got $13 billion, Morningstar’s estimates show. Vanguard Group, whose $2.4 trillion in assets make it the largest mutual-fund company, won equity deposits of $61 billion.

Technology Crash

In the past, investors returned more quickly to stocks after market declines. When the S&P 500 Index (SPX) plunged almost 50 percent from March 2000 to October 2002 following the collapse of the technology bubble, retail investors shook off the damage and added $140 billion to stock funds in 2003.

The 38 percent drop for stocks in 2008, the worst year for the U.S. benchmark since World War II, had a deeper impact on psychology because the losses were so widespread, said Burton Greenwald, a mutual-fund consultant based in Philadelphia.

“The public was beaten down,” he said in a telephone interview. “It took a long time for confidence to return.”

The S&P 500 Index has risen from 676.53 in March 2009 to 1,781.37 at yesterday’s close, lifting equity-fund returns.

“A lot of people may regret not getting in earlier,” Michael Rawson, a Morningstar analyst, said in a telephone interview.

Bond Losses

For now, the gap between stock and bond returns is widening. The Barclays U.S. Aggregate Index, a common bond-fund benchmark, declined 1.4 percent this year through Nov. 19, headed toward its first loss since 1999.

Dismal fixed-income returns, and the potential for worse, are on clients’ minds, said Theresa Wan, a financial planner who advises individual investors in Dumont, New Jersey.

“People seem to realize that if they want their money to grow they have to be willing to take more risk,” Wan said in a telephone interview.

One of her clients, retired doctor Michael Resnick of Suffern, New York, in July agreed with her suggestion to increase his allocation to stock funds to 35 percent from 30 percent.

Resnick, 77, said he was wary because he has a low tolerance for absorbing losses.

“But expectations for bonds are very low, maybe 2 percent or less,” he said in a telephone interview.

So far, Resnick is comfortable with the change.

“I’m sleeping all right,” he said.

To contact the reporter on this story: Charles Stein in Boston at

To contact the editor responsible for this story: Christian Baumgaertel at

Enlarge image New York Stock Exchange

New York Stock Exchange

New York Stock Exchange

Jin Lee/Bloomberg

A trader works on the floor of the New York Stock Exchange (NYSE) in New York.

A trader works on the floor of the New York Stock Exchange (NYSE) in New York. Photographer: Jin Lee/Bloomberg

Nov. 21 (Bloomberg) -- Charles Schwab, founder and chairman of Charles Schwab Corp., and Walter Bettinger, chief executive officer, talk about investor sentiment and the impact of Federal Reserve policy on financial markets. They speak with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

Nov. 20 (Bloomberg) -- Wells Fargo Asset-Management Chief Executive Officer Mike Niedermeyer talks about China's central bank's reform plan, the implications for Asia, and global investment strategy. Niedermeyer also discusses Federal Reserve monetary policy and its impact on markets. He speaks with Angie Lau on Bloomberg Television's "First Up." (Source: Bloomberg)

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