Lipper Research Analyst Don Cassidy on "Business for Breakfast" 1060 KRCN

Tuesday, June 21, 2005

A. Right. The net flows, as we call them, were more positive than in anymonth since February.

Q. Numbers??

A. Equity funds +$21 billion (net INflow)

Bond funds +$3 billion

Money Markets -$12 billion (OUTflows).

Q. Why, do you think flows got stronger in May?

A. Well, the stock and bond market both had very "merry" months in May,and people invest when they are comfortable- and sell or hesitate to buywhen they are scared or skittish.

Q. Is that a very strong and typical pattern?

A. Unfortunately, yes, it repeats on both a long-term cycle basis and frommonth to month as well. Net flows to stock funds in April, when the marketwas making a six-month low, were only about $10.3 billion, so flow doubledwhen the market gained 3 or 4%. The high month this year was February,which was about +$27 billion, and that came right after the top of the bigrally that had started around election time.

Q. People just make a habit of buying high and selling low?

A. Right, sadly. They tend to buy late, after they develop comfort aboutthe market. And then they also sell late, after a decline finally "gets tothem." And then they stay in cash well past the bottom, out of fear, sothey buy late again.

Q. What kinds of funds were people buying in May, then?

A. Actually, this was also interesting, since it looked as though theirchoices were getting a little more confident or aggressive too.

• About $7.5 billion went to overseas stock funds, which have been beatingdomestic, despite the dollar getting stronger.

• VALUE funds took in about $2 billion net, which was twice as much asGROWTH style funds. But this was the first plus month for Growth sinceJanuary 2004 (the top of the big 2003 rally!).

• Real Estate funds took in $700 million, but that was not as much asearlier in the year when people were more cautious.

• Technology funds took in $400 million, only their 3rd plus month in thepast 18! Of course, tech stocks gained 9% in May!!

• Balanced funds - cautious choices - took in almost $2 billion, but that wasbelow their average for recent months.

Q. What about bond funds?

A. Well, here we saw bigger inflows ($3.3 billion) than in April, duringthe second month of a good run in bond prices as yields fell.

Q. What kinds of bond funds were popular?

A. People were reaching for yield but being a little careful about it --quite selective...

• Junk Bond funds had $800 million flow OUT (the GM/Ford downgrades episodewas unsettling) but Emerging Markets Debt added $400 million;

• Global Income took in $500 million, and high-yield MUNIs took in over$750 million.

Q. And all of those have the attraction of higher yield.

A. Right, so people were either more confident about the economy, or justreaching for yield, or some of both.

Q. What about TIPS-bond funds? We've heard a lot of buzz about thoselately...

A. They took in a net of about $100 million, which was smaller than inrecent months. People were more relaxed about inflation and rates, so thebig attraction of TIPS was not as immediate as earlier when rates had beenrising.

Q. And you said money flowed out of money-market funds? I thought rateswere rising there lately.

A. Rates definitely are up, but there are many factors driving net flows.The fact that stocks and stock funds got more attention probablycontributed to some re-flow out of money funds. And I believe householdsare straining a little with home-refinancing cash flow way down. So somepeople may have been writing MMF checks to balance the household accounts.May normally is an inflow month for money funds, so the outflow was a clearexception.

Q. What do you make of all this? What can investors do to use this kind ofinfo?

A. I always advise people to try and avoid the crowds. So if you hear a lotof people talking excitedly (or panicking) about the stock market or someparticular type of investing, you can bet that it has been hot (or verypainful) lately and it is probably already getting late to be abuyer/seller. If you are a good contrarian, you try to go in the oppositedirection when the numbers become extreme.

If you are not a good timer, and most people are not, you should use thenumbers defensively if at all, and just keep on doing your regular monthlyinvesting from your checking account and by way of your investment plan atwork. Stay diversified, and your returns will not have big extreme ups ordowns! But resist becoming overly excited or overly scared by short-termtrends. In this case, try not to always 'go with the flow.'

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Don Cassidy is a Senior Research Analyst at Lipper specializing in fund flows, exchange-traded funds, (ETFs), closed-end funds, equity fund performance, and author of Trading on Volume (McGraw-HIll).