U.S. Mutual Funds Reaping Record Deposits as Markets Rise

Individual investors rushed into stocks and bonds in January, setting the stage for the biggest month on record for deposits into U.S. mutual funds.

Long-term funds, which exclude money-market vehicles, attracted $64.8 billion in the first three weeks of the month, according to the Washington-based Investment Company Institute. The previous record was $52.6 billion for all of May 2009, according to the ICI, whose data go back to 1984.

Signs of improvement in the U.S. economy and a rising stock market that pushed the Dow Jones Industrial Average above 14,000 yesterday for the first time since 2007 have prompted Americans to step up their investments. Equity mutual funds gathered $29.9 billion in January’s first three weeks, more than for any full month since 2006.

“People have decided that the omens are really not that bad so they are taking a fresh look at riskier asset classes,” Cameron Brandt, research director at Cambridge, Massachusetts-based EPFR Global, said in telephone interview. The firm tracks flows into mutual funds worldwide.

Hiring climbed in January after accelerating more than previously estimated at the end of 2012, evidence the U.S. labor market was making progress. Payrolls rose 157,000 after a revised 196,000 advance in the prior month and a 247,000 surge in November, Labor Department figures showed yesterday in Washington.

Economic Improvement

Manufacturing in the U.S. expanded more than forecast in January, reaching a nine-month high and showing the industry is starting to perk up, data from the Institute for Supply Management showed yesterday.

“As economic life across America slowly improves, stock funds will increase too,” Avi Nachmany, director of research at New York-based research firm Strategic Insight, wrote this week in a report. Mutual-fund deposits may exceed $90 billion in January when final data are available, according to estimates by Strategic Insight.

Investors may also have been encouraged by the compromise struck by the U.S. Congress at the start of the year to avoid more than $600 billion in scheduled tax increases and spending cuts that could have damaged the economy.

“When we got beyond the fiscal cliff it unlocked a lot of money,” David Kelly, chief global strategist for New York-based JPMorgan Funds, said in a telephone interview. “That was a big risk that was removed.” The unit of JPMorgan Chase & Co. manages $367 billion.

S&P Gains

The Standard & Poor’s 500 Index, a benchmark for large U.S. stocks, gained 6.1 percent this year after advancing 13 percent in 2012. The 20-member S&P index of custody banks and asset managers is up 11 percent in 2013.

Asset-management firms have noticed the change in investor behavior.

“In January people have moved back into equities,” James Kennedy, chief executive officer of Baltimore-based T. Rowe Price Group Inc., said in a Jan. 29 interview. “It is true for the industry and it is true for us.”

The firm’s mutual funds suffered redemptions in December as customers waited for U.S. political leaders to strike a budget deal, Kennedy said. T. Rowe Price oversaw $577 billion as of Dec. 31.

At Invesco Ltd., the owner of Invesco, Van Kampen and PowerShares funds, sales of equity products in January were running 50 percent higher than in the fourth quarter, Chief Financial Officer Loren Starr said this week in an interview.

‘Extraordinary Month’

“January has been an extraordinary month in terms of flows coming back into a whole range of products,” Starr said. Atlanta-based Invesco has $688 billion under management.

Franklin Resources Inc., manager of the Franklin and Templeton mutual funds, reported yesterday that investors pulled $6.4 billion from its stock funds in the fourth quarter.

“As U.S. equity flows come back we would expect to see, like many, a stronger number this quarter,” CEO Gregory Johnson said on a conference call. San Mateo, California-based Franklin manages assets of $782 billion.

Money flowed into both international and domestic stock funds in the first three weeks of last month, according to the ICI, whose data for the fourth week will be released Feb. 6. Domestic equity funds suffered redemptions for the past six years as clients piled into fixed income, ICI data show.

Stock funds last attracted more money in March 2006, when they drew $33.1 billion. In February 2000, just ahead of the collapse of technology stocks, equity funds won a record $56.3 billion, according to ICI data.

Clients contributed $28.1 billion to bond funds in the first three weeks of January, according to the ICI, even as money managers such as Dan Fuss of Loomis Sayles & Co. warned that rising interest rates could hurt bond performance.

“For heaven’s sakes, don’t go out and borrow money to buy bonds right now,” Fuss said this week in an interview. Fuss, who oversees $66 billion, called the fixed-income market more “overbought” than at any time in his 55-year career.

Before it's here, it's on the Bloomberg Terminal.