Lipper Research Senior Analyst Don Cassidy on "Business for Breakfast" 1060 KRCN Tuesday - September Mutual Fund Flows

Tuesday, October 25, 2005

A. Right. And flows in September were somewhat better than in August.

Q. How about some overall numbers?

A. Sure:

• Equity funds +13.0 $Billion
• Bond funds + 5.2 $Billion
• Money funds -14.0 $Billion

Q. That's interesting, but I would have expected, with rates rising, thatthere would be inflows in money funds.

A. Well, you are quite correct in conceptual sense, and flows have beenbetter than a year ago for quite a while now, but September is seasonallyan outflow month, with corporate and personal estimated-tax paymentscausing a drain. This year's September number was the smallest Septemberoutflow since 2002, down from $43 billion just a year ago. Higher ratesand a choppy stock market do help there.

Q. Speaking of a choppy stock market...

A. Yes, unless this little recent rally gets much stronger over the nextfew days, I would think October flows in stocks funds would be well belowthe September levels. The first half of this month scared some money outof funds. On a short-term basis, the recent performance is always a strongdriver.

Q. What kinds of stock funds were pulling in money during September?

A. The big winners, as so consistently the case lately, were fundsinvesting outside the USA. People are looking at a falling dollar again inthe wake of Katrina's budget impact. About $10.3 billion, or 80% of thetotal flow, went to world-equity funds in September.

Q. What else was grabbing investors' attention and dollars?

A. Predictably, with the news of high energy prices being blasted at usevery day, Natural Resources funds took in $2 billion, so their total fornine months (+$9.45 billion) is more than twice what they took in for all2004.

Q. How about Real Estate funds? Didn't they take a performance hit?

A. That is correct! They had a second consecutive outflow month, withabout $250 million draining away. That is after about three years of heavyinflows virtually every month. It looks like people have finally heard somuch that they have become scared in this space, even though thefundamentals for REITs are much better than for home building.

Q. Were there any kinds of sector funds (besides energy) that had positiveflows?

A. Utility funds took in about $100 million, since their stock performanceheld up well while the REITs took it in the chin. And Gold funds took inabout $270 million net, as metal was rising and "inflation" was on theminds of a lot of people.

Q. How about our old friends, the beaten-down technology funds?

A. They had another $700 million or so drain away. This seems ironic, sincelately technology funds have been performing better than some other marketareas. But a lot of people are still in "get-even-and-get-out" mode.

Q. Any big draws in equity-fund types?

A. Sure. Income funds took in $3.1 billion and Balanced funds added $1.1billion. Those latter funds have a win streak of 46 months now.

Q. What were people doing in bond funds?

A. People are being cautious and selective. Long-term funds took in only$300 million, while short/intermediates added $4.9 Billion. Both taxableand municipal bond funds had net inflows. The bond numbers overall wouldhave been a lot stronger except that they included more than $3 billion ofoutflows in high-yield or "junk-bond" funds. Winners included the TIPSbond funds (+$500 million) and some inverse bond funds. It was interestingthat while taxable high-yield funds had those big outflows, municipal highyield funds took in well over $400 million at the same time.

Q. What's the overall big picture for flows?

A. Generally, except for chasing performance in energy and overseas, peopleare cautious and are going for value and income rather than hoping forgrowth. The mood reflects the market's lack of upside holding power.

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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).