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Stock Fund Redemptions at Modest Level

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Despite October redemption activity being high in the first two weeks of the month, stock fund redemptions for the past few weeks have been “modest and reassuring,” while 401(k) investors’ transfers from equity funds to safer alternatives, “while rising periodically, remained minimal in the past two weeks following the early October spike,” according to recent research from Strategic Insight, a business intelligence provider to the mutual fund industry.

Says Strategic Insight: “Although October redemption activity was elevated, high-volume defensive switches were concentrated in just a few days of extreme stock market anxiety, mostly during the second week of the month. And even during such high-volatility days, stock fund redemptions reached just 0.3% of stock fund assets: this means that $997 out of every $1,000 stayed put.”

This is not surprising, Strategic Insight says, because its research, supported by findings from the Investment Company Institute, “consistently shows that during the past 30 years, spikes in fund redemption activity tend to be short-lived and non-recurring. For all of October, stock fund net redemptions are estimated at roughly 1.5% of equity fund assets in aggregate — not surprisingly, at the high end of historical experiences,” according to preliminary estimates by Strategic Insight.

While these observations were confirmed in a number of Strategic Insight interviews, they are also exemplified by the Hewitt Associates 401(k) Index, which captures the daily activity of nearly 1.5 million investors in 401(k) plans. “The data … shows that among these investors, transfers from equity funds to safer alternatives, while rising periodically, remained minimal in the past two weeks following the early October spike,” Strategic Insight says. “The Hewitt data shows the portion of balances transferred on any one day during the days of highest anxiety in early October was just three out of every $1,000 invested (equal to 0.3% of assets). Clearly, 401(k) investors are picking asset-allocation strategies and sticking with them.”

Strategic Insight found that industry-wide stock fund flows have been relatively stable during a period of such market volatility because U.S. equity funds are anchored by retirement accounts. More than 60% of U.S. equity fund assets are in retirement accounts, including 401(k) accounts, IRAs and variable annuities,” Strategic Insight reveals. “These represent more stable assets, as investors have absorbed 25 years of education on dollar-cost averaging and regular contributions. And most of stock fund assets intended to be used only many years from now, investors face no need to withdraw cash during times when value of their holdings are declining.”

Looking ahead, Strategic Insight says that the “major factor affecting equity mutual fund flows during an extended period of market uncertainty is not overwhelming redemptions but a decrease in new purchases.” Yet the firm found “steady retirement-related investing (including the recurring demand for lifecycle funds-of- funds, which was boosted by the 2006 Pension Protection Act), dollar-cost-averaging deposits, the ongoing shift to managed funds from individual stock dependency both outside and inside retirement plans, and some opportunistic buying at lower prices will combine to prevent equity fund net redemptions from becoming sustained and large.”


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