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Suddenly, Amazon Doesn't Love Its Moms AnymoreIndividual investors gradually are coming home to domestic mutual funds after running from them since early May through mid-September. TrimTabs, an investment research firm that tracks the money flows of mutual funds reports that between Oct. 3 and Oct. 16, U.S. domestic mutual funds received $1.2 billion in new cash, which is an average of $170 million per day. Most of the year, domestic mutual funds were bleeding cash as investors moved to world or international stock funds. In fact, the daily outflow of cash averaged $270 million from May through August 2006.
To put this in perspective, the daily inflows of cash remains well below the amount of cash that went into domestic mutual funds in 2000, before the Internet bubble had burst. In 2000, average cash inflows for domestic mutual funds was $1 billion and annual inflow was $259 billion. For 2006, cash inflow to U.S. equity mutual funds averaged $100 million daily and its annualized inflow is projected to be just $25 billion. 2001 and 2002 was the only recent period of inflows lower than that, with an average inflow of just $15 billion annually.
Why should this matter to mutual fund investors? When mutual funds bleed cash it means that managers must either keep more of the mutual fund's portfolio in cash to be able to meet the redemptions or they could be forced to sell assets in order to give exiting fund holders their money. Maintaining a larger portion of a portfolio in cash means a slower growth rate, since cash doesn't have as much potential for growth as a stock investment does. Being forced to sell assets can result in a loss for the portfolio, especially if the stock being sold is not in a gain position, or it can mean significant capital gains distributions at the end of the year if a significant portion of the stocks that had to be sold had long or short term gains. Either way, the mutual fund holders that stick around can be hurt when a mutual fund experiences large outflows of cash. With the recent increase in inflows, this could now change.
During this exodus from domestic mutual funds, corporate America has been taking up the slack by buying its outstanding shares. In fact TrimTabs reports that the reduction in outstanding shares year-to-date is a record $496 billion. Charles Biderman, CEO of TrimTabs says, "If individuals join companies and portfolio managers in buying heavily, a runaway bull market is the likely result as more money chases fewer shares." The Investment Company Institute (ICI), whose members include all the major mutual fund companies, reports they are still seeing a strong inflow of cash into world equity funds.
In reality, your best bet is to keep a well-balanced mutual fund portfolio that includes both domestic and international stock mutual funds, as well as bond funds. The mix that's best for you depends on your risk tolerance and your investing horizon.
Lita Epstein is the author of more than 15 books, including the upcoming Pocket's Idiot Guide to Mutual funds due out in 2007.
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