Mutual Fund Withdrawals a Record as Investors Flee

Oct. 9 (Bloomberg) — Investors pulled a record $52.1 billion from U.S.-managed stock and bond mutual funds in the past week, seeking the safety of government-insured bank deposits as the financial crisis worsened.

Shareholders took $43.3 billion from stock funds and $8.8 billion from bond funds in the week ended Oct. 8, according to data compiled by TrimTabs Investment Research in Sausalito, California. The exodus followed $72.3 billion of outflows in September, the most in a single month. Investors deposited $185.5 billion into bank accounts last month through Sept. 22, TrimTabs said, citing U.S. Federal Reserve data.

“People are scared,” Conrad Gann, TrimTabs’ chief operating officer, said in an interview. “This market is different from what we’ve seen before.”

The five largest diversified U.S. stock fund managers, including Fidelity Investments and Vanguard Group Inc., posted an average 28 percent loss this year through Oct. 6, about 2 percentage points worse than the Standard & Poor’s 500 Index, according to Morningstar Inc. Investors mostly switched into fixed-income through August, putting $97 billion into bond funds while withdrawing $74 billion from stock funds, TrimTabs said.

“A lot of our favorite stock funds had financial bets that hurt heavily,” said John Coumarianos, a stock analyst with Chicago-based Morningstar. “Others were heavily weighted in international stocks to boost returns, a move that backfired.”

1987 Comparison

Stock-fund withdrawals represented 1.3 percent of equity assets, said Brian Reid, chief economist at Investment Company Institute, a Washington, D.C.-based mutual-fund industry organization. During the market crash of 1987, stock fund outflows were 3 percent of assets, the ICI said.

Mutual funds held a total of $11.6 trillion on Aug. 31, including $5.6 trillion in stock investments, $1.8 trillion in bonds and about $4.2 trillion in money-market assets, according to ICI data.

Boston-based Fidelity’s U.S. stock funds lost an average of 32 percent, the most among the group, Morningstar said. The $29 billion Magellan Fund has plunged 44 percent this year through yesterday, the worst performer among actively managed U.S. stock funds with assets of more than $20 billion, according to Bloomberg data.

American Funds, Vanguard

“Nine months is a short time to assess properly a fund’s performance,” Fidelity spokeswoman Sophie Launay said in an e- mail. “This is even more relevant in the type of market environment we have seen so far this year, when the market’s higher volatility may cause some long-term investors overwrought with fear to make rash decisions that alter a well diversified portfolio.”

At American Funds, run by Los Angeles-based Capital Group, the average U.S. stock fund declined 28 percent this year. Growth Fund of America, the largest U.S. mutual fund with $179 billion in assets on Aug. 31, fell 33 percent, lagging behind 63 percent of its peers, Bloomberg data show.

Stock funds managed by Vanguard, based in Valley Forge, Pennsylvania, and Baltimore’s T. Rowe Price Group Inc. fell an average of 27 percent. At Franklin Resources Inc. in San Mateo, California, stock funds dropped 28 percent.

The S&P 500 fell 8.9 percent in September including reinvested dividends, the worst one-month performance in six years. The index has fallen 37 percent this year, and today slipped to its lowest level since April 2003.

Bond mutual funds have fallen 4.5 percent this year, Morningstar data show, as investors have shunned all but the safest government-backed debt.

Credit Crisis

The credit crisis that began last year with the collapse of the subprime-mortgage market drove companies such as Lehman Brothers Holdings Inc. into bankruptcy in September and led the U.S. government to enact a $700 billion financial rescue plan.

The Reserve Primary Fund last month became the first money- market fund in 14 years to fall below $1 a share, known as breaking the buck. The decline resulted from losses on short- term debt issued by Lehman and triggered a run on money funds.

The Treasury has started an insurance program that protects investors against losses on money deposited with participating funds. Investment companies with more than 95 percent of money- market fund assets have signed up.

Investors put $49.4 billion into money-market mutual funds in the week ended Oct. 7, according to data compiled by IMoneyNet Inc., of Westborough, Massachusetts.

Vanguard spokeswoman Rebecca Cohen said some investors moved money from stock and bond funds into the firm’s money- market funds, though she called it only a “modest portion of our investor base.”

Investors might have been driven toward banks by an extra measure of protection from the Federal Deposit Insurance Corporation, which announced last month that it would raise its bank deposit insurance to $250,000 from $100,000.

To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net.

Last Updated: October 9, 2008 17:27 EDT
By Sree Vidya Bhaktavatsalam

Source: Bloomberg

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