Cautious Consumers Embrace Bond Funds, Still Shy On Equities

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Consumers continue to view equities with some apprehension and seem to be favoring bond funds, mutual fund industry data suggest.

And, according to a recent Merrill Lynch report, they may be justified.

Investor movement to bond funds that Vanguard Group, Valley Forge, Pa., has experienced throughout 2002 continued in November, according to John Woerth, a Vanguard spokesman.

At Vanguard, November net new money into bond funds–defined as purchases less redemptions and plus/minus exhanges from other Vanguard funds–totaled $900 million. Equity inflows totaled $640 million, and money markets reached $500 million.

Bond funds were largely taxable funds but also included tax-free funds, according to Woerth.

October was the exception to bond inflows with investors moving $540 million out of funds, largely due to the fact that interest rates spiked somewhat, he adds.

What Vanguard learned as a result of a recent survey, Woerth says, is that 70% of investors did not understand the inverse relationship between interest rates and a bond funds net asset value. So, he continues, if interest rates start rising, investors need to be more aware of the impact on their funds shares.

Fund sales at T. Rowe Price, Baltimore, suggested some tentative confidence in returning to equity funds, according to Brian Lewbart, a T. Rowe Price spokesman.

Although Lewbart says the company does not discuss fund cash flows, he adds that exchanges are showing some slight movement into equity funds and out of money market funds.

That movement is slow, he says, because the retail investor wants to see “longer proof” the economy and stock market are improving.

There are also slight outflows from international funds and inflows into high yield funds, Lewbart says.

The movement into high yield funds reflects both the current low interest rate environment as well as the belief that the “economy is improving, although modestly and somewhat slowly.”

That tentativeness, was reinforced by data released by the Investment Company Institute, Washington.

In October, reaction to market vagaries continued as evidenced by a $7.71 billion outflow from stock funds. This followed an outflow of $16.1 billion in September.

Balancing this outflow were inflows of $6.3 billion in bond funds and $11.18 billion in money market funds in October. Bond fund inflows in October built on $15.39 billion recorded in September, while the money market inflow reversed a significant $61.89 billion outflow from money market funds in September.

That outflow, according to money market watchers was due to a large degree to institutional investors moving money back to banks in a search for better yields.

But October ICI figures belied these findings, indicating that money market funds offered to institutions had an inflow of $14.07 billion while money market funds offered to individuals had an outflow of $2.89 billion.

Consumers are not the only ones that are cautious over stocks.

The equity market still appears highly speculative and, consequently, an asset allocation that places less emphasis on stocks is appropriate, according to a report prepared by Richard Bernstein, chief U.S. strategist with Merrill Lynch, New York.

This speculation is typically indicative of an end of market cycle, not of the beginning of a major bull market, Bernstein adds in his report.

In the report released Dec. 3, he recommends a weighting of 45% stocks, 35% bonds and 20% cash, a change from a 50% stock, 30% bond and 20% cash.

Bernstein is maintaining a S&P 500 target of 860. At press time, the S&P 500 was 927.15. One of the reasons he cites for signs of speculation in the equity market is a perception that investors are ignoring geopolitics. For instance, he writes, that there is a belief that a war in Iraq will be short and oil prices will plummet. Although he declines to speculate on war with Iraq, he expresses doubt that oil prices will plummet.


Reproduced from National Underwriter Life & Health/Financial Services Edition, December 16, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.