Fund Spree Begs the Question: Is This Maniacal?

Small investors plowed an unprecedented $11.3 billion in net new money into stock mutual funds in March, but the record may not stand for long: April purchases were even better, many fund companies say.

The ongoing fund buying wave this year is reinforcing Wall Street’s sense of both wonder and dread at investors’ torrid love affair with stocks. While gleeful over their good fortune as middlemen in this relationship, many fund officials fear that the buying has reached the mania stage, signaling the end of the 2 1/2-year-old bull market.

That is pure conjecture, of course. With the growth of payroll-deduction retirement plans such as 401k programs, a rising portion of mutual fund monthly purchases now are automatic. So how much of this buying wave is part of a secular trend, versus short-term speculation? Nobody knows.

Still, asked about the likelihood of this cash avalanche signaling a market top, an officer at one fund company put it this way: “I’m not going to agree with you on the record.”

The March stock-fund cash inflow was reported Thursday by the Investment Company Institute, the funds’ trade group. The $11.3-billion total surpassed the record of $10.2 billion in January.

The ICI also said investors pushed $8.5 billion in net new money into bond funds in March, down from $10.7 billion in both January and February.

The “net new money” figures measure fund purchases net of redemptions and dividends, adjusted for exchanges among funds in the same families. These numbers are considered a pure gauge of the new buying power that the funds are handed each month by individual investors.

With April ending today, many of the largest fund companies say they expect to finish the month with heavier stock fund purchases than even March’s huge total. The Vanguard Group in Valley Forge, Pa., says its stock fund cash inflows are up 15% this month versus March. T. Rowe Price Associates in Baltimore expects April to be its second-best stock month, after January.

Two themes are driving April stock fund purchases, many fund companies say:

* International investing. Almost universally, the hottest-selling stock funds this month have been foreign funds. While U.S. stocks have struggled only to small gains this year (or losses, in the case of many smaller stocks), many foreign markets have soared--especially Japan.

For better or worse, a turn in the fortunes of any market often brings investors running to get on board. “People go with performance,” admits Steve Norwitz, spokesman for T. Rowe Price. His firm’s international stock funds have seen net cash inflow double in April from March, he says.

At Financial-Invesco Funds in Denver, the company’s Pacific Basin stock fund has taken in $44 million in April--doubling its assets to $90 million, spokeswoman Laura Parsons says.

* Retirement investing: As expected, many fund companies did land-office business with individual retirement account customers this spring. Much of the inflow came in the form of rollovers of IRAs that had been in low-yielding bank CDs and other short-term accounts, fund officials say.

“I think the interesting side story (to the stock market) this year is the return of the IRA,” says William Shiebler, senior managing director at Putnam Funds in Boston. Purchases of funds for IRA accounts are up 100% this year over last year at Putnam, Shiebler says.

If there’s one worrisome aspect to the latest mutual fund numbers (beyond the stock-mania fears), it’s the falloff in demand for bond funds. The decline in net cash flow into bond funds in March carried into April as well, many funds say.

Vanguard, for instance, said its April cash flow into fixed-income funds overall was one-third March’s level. At Financial-Invesco, bond investors sold more than they bought this month.

An outflow from bonds isn’t unusual at this time of year because investors sometimes pay tax bills by drawing on bond funds. But investors may also be starting to worry about the possibility of rising interest rates. If cash begins to flow out of bond funds at a heavy rate, it could accelerate any upward move in rates by forcing fund managers to dump securities wholesale.

It’s still too early to call that trend, but with $622 billion sitting in bond funds, it bears watching.

Meanwhile, what are stock fund managers doing with all of their fresh cash? Many are putting it to work as fast as they can, but it’s still piling up. ICI says stock-fund cash reserves now total 9.9% of assets, highest since August. Bears beware: that’s fuel for at least one more big stock rally!

Stock Fund Record

Investors poured an all-time high of $11.3 billion in net new money into stock mutual funds in March, the Investment Company Institute reported Thursday. The trend over the last year: March, 1993: $11.3 billion Source: Investment Company Institute