Lipper Research Senior Analyst Don Cassidy on "Business for Breakfast" 1060 KRCN - Strong Money Flows Into Funds in March

A. Right. And the March numbers were especially strong-looking...

Q. Details, please?

A. Equity funds--$34 billion--for the best March on record and only thesecond time in the last 24 years when March was better than February--evenbetter than the $31 billion of January.Bond funds--$4.6 billion, in spite of the rising interest rates being soprominent.Money fund flows--minus 7.2 billion. March is seasonally weak, but this wasthe smallest March outflow in the past five years.

Q. What kinds of funds were people plowing money into, to make the totalsso strong?

A. In equity funds there was a newfound taste for U.S. Diversified, at$16.7 billion versus about $9 billion in February. World equity flowsremained strong at $16.4 billion as well.In bond funds people were buying TIPS, overseas funds (dollar play again),and medium-quality but not junk funds ($1 billion outflow).

Q. How about sector funds?

A. Inflow of only $300 million net, with real estate funds the big winnersat $700 million. Only about $100 million went into natural resources funds,since energy prices had cooled off. Health/Biotech funds had a $250-millionoutflow as performance was low. Generally, a small amount of flows insector funds means the market is not overheated.

Q. But if people are not highly bullish, what is driving the big money in?

A. Well, that is the big question. We see two possible explanations, andthere might be elements of truth in both.

Q. Okay, and I suppose one might be just the strength of the market itself?

A. Right. We've had a rally of about 11% on the S&P--and more on some otheraverages--with really no painful setbacks, since last October. And five orsix months of good markets give people increasing comfort and courage astime increases.

Q. So, that "comfort" explains why people do not buy right away at thebottom but wait a while and end up buying higher?

A. Right. And of course, also, they take a while to see more clearly whichthemes, industries, and groups are leading, and which are not.

Q. Okay, so how about the other reason why flows have started to get sostrong lately?

A. Well, in two words, Paul McCartney.

Q. The former Beatle?

A. Exactly. Fidelity has been running a big ad campaign in which he isfeatured, talking about lifestyles and life phases, saying this is the timefor the Boomers to get serious about investing for their futures.

Q. Maybe even a little later than the right time...

A. I won't argue against that! But in any event, Fidelity credits thatcampaign for a major influx of new accounts and net new money in its fundsin recent months.

Q. But not enough to push the overall industry numbers way up...?

A. Not directly, no. But if that theme is catching on in people's heads,they could be buying mutual funds of any brand, load or no-load. If themindset is taking hold, it becomes easier for brokers to sell funds oftheir preferred brands to clients as well.

Q. So, as you said earlier, it is possible that both of these forces arenow helping push money flows into mutual funds higher?

A. Right. It's really not possible to measure the causes or to separatethem. I would imagine if the McCartney campaign were being done during adown-market phase, it would be having much less effect. So, the conditionsdo interact.

Q. You mentioned there does not seem to be a lot of speculative fundbuying?

A. Right. The big asset gains have been in diversified funds, not insectors. And within the diversified area, people are choosing core andmulti-cap, which are middle-of-the-road choices, rather than makingnarrowly targeted picks like small-cap value and so on. Small-cap hasactually been the best performing area in 2006 so far, but the money is notchasing after it.

Q. How about money going into world equity funds, Don?

A. Those numbers are still strong--at about $16 billion for March--butdomestic flows have improved a lot, which again looks like cooler money tous. A few months ago, world funds were getting about 80% of the total,which was hot money chasing world markets and a weak dollar play and so on.

Q. So, will we eventually be able to figure out the causes down the line?

A. I would say the first time the market takes a little correction for amonth or more, we will watch how sharply the net flows cool down: that willtell us a lot.

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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).