Despite the wild markets, investors are not abandoning stock mutual funds.
Mutual fund redemptions have remained relatively stable during the market turmoil in part because of the stabilizing influence of retirement plans, according to Strategic Insight Mutual Fund Research and Consulting LLC of New York.
"The data very strongly show people are staying the course," said Avi Nachmany, its director of research.
Although fund flows out of stock funds picked up in September and October, the outflows have not been above normal, compared with past periods of volatility.
The most extreme action from 401(k) investors peaked out at about 0.3% of net assets per day in early October during the most precipitous drops in the market, said Catherine Brandt, a spokeswoman for Hewitt Associates LLC of Lincolnshire, Ill. Hewitt collects data on 1.5 million 401(k) participants with nearly $110 billion in assets.
Likewise, in a report this month, Strategic Insight said redemptions from U.S. stock funds during early October also ran up to 0.3% of assets. "This means that $997 out of every $1,000 stayed put," the report said.
Investors have an aversion to realizing losses and "are more likely to react to market downturns with paralysis than with massive shifts in allocations," it said.
Higher levels of switching activity generally don't last, Strategic Insight said. Mr. Nachmany said that conclusion is based on 30 years of market history.
Within 401(k) plans, net transfer activity through October remained "consistently low in relation to total 401(k) balances — to date, about 0.06% per day," Hewitt Associates said on its website.
Mr. Nachmany said that true to historical form, investors are settling back into normal behavior patterns after experiencing a tumultuous drop in the market. Normal new flows, in or out, average around 2% to 3% of assets per month, he said. During market extremes, flows bump up to 3% to 4%.
Bear markets do, however, cause a lower level of new sales, according to Strategic Insight.
Hewitt Associates' data through Nov. 7 show that after early October, the switching activity in 401(k) plans for the most part returned to normal.
Meanwhile, for savvy investors, seeing others panic can be good news. That's because mutual fund investors tend to flee in the greatest numbers at a market bottom, Mr. Nachmany said.
But exactly where a bottom occurs is apparent only after the market recovers, he said.
HELPING HANDS
The fact that more than 60% of U.S. equity fund assets are housed in retirement accounts helps to stabilize flows, Strategic Insight said. These plans create a more stable asset base because they receive regular inflows and are held for the longer term.
Going forward, though, retirement plans may not play as much of a moderating role, said Jason Chepenik, owner of Chepenik Financial Services of Winter Park, Fla., which manages about $1 billion, most of it in 401(k) plans.
Investors who are automatically enrolled in 401(k)s and don't pay attention to the markets will continue to dollar cost average, said Mr. Chepenik, who is affiliated with NRP Financial Inc. of Bryan, Ohio.
But with the market off by half, "it's much more difficult to have that discussion [about automatic enrollment] with employers right now," he said.
More investors may withdraw from stock funds as they become aware of how much they have lost, Mr. Chepenik added.
ETFs have also moderated the loss of assets.
Not including ETFs, stock mutual funds had year-to-date net cash outflows of $124 billion through September, the latest data available, according to the Investment Company Institute of Washington.
Over the same period last year, net inflows to stock funds were $89.6 billion.
But including ETFs, domestic-equity mutual funds through September actually gained $10.1 billion in inflows, compared with $43.3 billion for the first nine months of 2007, according to Financial Re-search Corp. of Boston.
Still, it is not a pretty picture for the equity fund business. A large part of the outflows this year came in September, when stock funds lost a net $56 billion.
Mr. Nachmany thinks outflows in October may have been even larger. But put in perspective, losses from outflows are not a major problem for the fund industry, he said.
Outflows for the first three quarters amounted to about 2% of the $6 trillion that stock funds had at the start of the year. Stock funds held $4.955 trillion in assets as of September, according to the ICI.
Market losses account for the bulk of the decline in assets from the beginning of the year.
E-mail Dan Jamieson at [email protected].
