John Spence

Investors Shy Away from Stock Funds in 2001 Despite Record Mutual Fund Inflows

Mutual funds enjoyed a banner year for inflows in 2001, taking in $434.5 billion last year, according to estimates from fund-tracker Lipper. However, just $33.6 billion of that flowed into equity mutual funds as investors shunned a stock market that posted dreary year-end returns for the major indexes.

Source: Morningstar, data as of the end of 2001

Although most investors didn't yank cash out of their stock funds in 2001, inflows decreased considerably from the $309.4 billion shoveled into stock funds in 2000.

So where did the money go in 2001? Money market funds took the lion's share of assets - about $325.3 billion. Bond funds raked in $75.6 billion, according to Lipper.

At the end of 2001, nearly $3.31 trillion was invested in stock funds, down from $3.65 trillion in 2000. The highest year-end total for stock funds was at the crest of the bull market in 1999, when they held about $4.04 trillion in assets, according to the Investment Company Institute (ICI), the mutual fund industry's trade group.

*combines taxable and tax-exempt funds          Source: Investment Company Institute

Although there are no hard numbers available yet, Morningstar fund analyst Scott Cooley says anecdotal reports indicate that equity fund inflows have been strong thus far in 2002. He notes that investors haven't stampeded out of stock funds, but as always they are apt to chase performance.

"In the late 1990s, there was a lot of hand-wringing suggesting that fund shareholders would bolt at the first sign of a bear market. That hasn't been the case," said Cooley. "That said, some folks apparently suspended their contributions to equity funds at times in 2001, and there's a substantial minority of investors who consistently chase recent performance. I think that's one reason cash flows have apparently picked up thus far in 2002: Some investors realized there was a rally in the fourth quarter, and they've decided they don't want to miss out on the action."

ETF asset growth breakdown in 2001

The ICI just released data on U.S. exchange-traded fund (ETF) asset growth during 2001. At year's end, there were 102 ETFs trading in the States based on domestic and international benchmarks.

*assets in millions of dollars            Source: Investment Company Institute

The total number of global ETFs trading will increase to 206 tomorrow with the introduction of IndexChange AG's newest ETF. The new fund is based on the FTSE 100 index and will trade on the Deutsche Bourse with an expense ratio of 0.50%.

It's good to be good, relatively speaking

The most recognized benchmark for socially responsible investing, the Domini 400 Social Index, held its own against the S&P 500 in 2001. The DSI 400 fell 12.07% in 2001, while the S&P 500 shed 11.88% of its value. The Domini Social Equity Fund, launched in 1991, is an index fund tied to the DSI 400. Other large socially responsible index funds include Summit's Total Social Impact Fund and the Calvert Social Equity Fund. Vanguard also offers an index fund tied to the Calvert Social Index of large- and mid-capitalization companies that meet certain social and environmental criteria.

Designed for investors with a conscience, the DSI 400 excludes companies involved in alcohol, tobacco, gambling, nuclear power, and military weapons. KLD Research & Analytics, which maintains the index, also looks at how companies treat their employees and the environment.

The DSI 400 has managed to edge out the S&P 500 during much of the 1990s due to a relative overweighting in technology.

*data as of the end of 2001

Obviously, the technology sector's woes have dragged the index down since the bubble burst. However, the tech rally in the last quarter of 2001 helped keep the benchmark respectable when compared to the S&P 500.