Lipper Senior Research Analyst Don Cassidy on "Business for Breakfast" 1060 KRCN
Tuesday February 1, 2005
Q. Don, I guess by now you have final numbers on what fund investors weredoing with their money for all of last year?A. Right.
Q. Before we go into any details, can you give an overall impression orsummary of what you saw?
A. Sure. Money went INTO stock funds, came OUT of bond funds, and a lot ofcash kept draining out of money-market funds. Generally I would say peoplewere, as usual, doing what made them comfortable rather than being smartcontrarians.
Q. OK, some details please??
A. Amount in ($Billions)
| | 2004 | 2003 |
| Stock Funds | +178 | +152 |
| Mixed-Equity Funds | + 43 | + 33 |
| Total Equity | +221 | +185 |
| Bond | - 10 | + 31 |
| Money Funds | - 155 | - 259 |
| Industry | + 56 | - 43 |
Q. Those look like a lot of dollars. Any idea how much of it works out to,per person?
A. Sure. There are about 92-93 million fund owners in the country, so thebottom line for 2004 came out to about $600 per person. Not a lot! AND...some of that total was institutional funds, so the amount per person waseven less in terms of dollars sent in by individuals directly. If yousubtract what went in through payroll plans like 401(k) and 403(b)s, itreally was not much otherwise!
Q. In 2004, people took money OUT of bond funds, after putting it IN during2003? I thought people were supposed to be "long-term investors".
A. Well, most people are longer term... the gross redemptions in bondfunds were only about 23% of assets last year. Bonds did well in 2002 anduntil mid- 2003, but since then it has been a mixed bag. People areskittish, I think, about almost everything since they lost so much in thebubble's aftermath. So they are quick to step aside. We had that rateshock last April and early May and bond-fund investors were pretty nervousafter that.
Q. You mentioned people were doing what makes them comfortable... does thateven apply in bond funds?
A. Yes indeed. We had record inflows in bond funds, about $130 billion,when the bond market was roaring in 2002. And in 2004 what attracted themost money was international bond funds, short-term funds, TIPs funds, andinverse funds. So people are definitely sensitive to where the short-termperformance has been. And the money follows the trend pretty closely!
Q. MONEY FUNDS! It looks like the drain from money funds slowed way downin '04, Don. Comments?
A. Yes it did, but the latest year was still the second-biggest outflowever, except for 2003. Low rates were certainly a part of it, and thatturned around a little in the second half.
Q. So, do you think people were gradually putting some "parked" money-funddollars back into stocks, or into stock funds, in '04?
A. Maybe a little. But money-fund flows are FAR FROM all just parked moneywaiting to go back in... there are four types of money in there...NOTlabeled...
Retail: investment balances waiting
Retail: transaction balances (MMF acting as a checkingaccount)
Institutional: investment balances waiting
Institutional: CORPORATE treasurer money -- very volatileresponding to tax payment and business liquidity cycles
Q. Any idea how much of the money market fund balances are retailaccounts?
A. Yes, only about 55% or so, plus whatever people might hold in their401(k)/IRA and similar accounts that would probably technically be in aninstitutional class in most cases.
Q. STOCK FUNDS! How do you interpret the money flow into stock funds, Don?The market was up more in '03, but the flows got bigger in '04 !
A. Confidence takes time to build up - or in this case to rebuild - on acumulative basis. So as we went into 2004 some more people who did notbelieve the 2003 run-up finally came back on board a bit more.
Q. But talk to us about what KINDS of funds they were buying.
A. That is where the story is REALLY interesting, and where you see thecomfort zones operating in 2004...
- WORLD equity + INFLOW $84 billion (dollar weakness, betterperformance overseas)
- VALUE funds+ INFLOW $55 billion
- GROWTH funds - OUTFLOW $15 billion
- LARGE-CAP - OUTFLOW $35 billion (lagging the market since mid1999)
- MULTI-CAP + INFLOW $70 billion - people not sure exactly WHEREto go, so they give the fund manager freedom
- TECHNOLOGY funds - OUTFLOW $7 billion (up a little, butlagging, after a strong year in 2003)
- REAL ESTATE funds +INFLOW $4.7 Billion (acted very well, andpeople want yield now!)
- NATURAL RESOURCES funds (includes Energy) +INFLOW $4.7 Billion(everybody knew the oil-price story)
Q. So what do you think people SHOULD do?
A. I certainly believe in being proactive and not just sitting still. Butyou can get too focused on shorter-term trends. If you do that, you willalways buy late and high, and sell late and low. So I would suggeststarting with a blank piece of paper and thinking about asset allocation.Given your age and needs and risk tolerance, where SHOULD your moneybalance be in percent terms? THEN, go for the various categories. Butalways keep some money in things that are NOT in favor right now, sincethey will rotate back in soon.
Q. Finally, any early sense of flows in January '05?
A. Pretty slim, I'm afraid. Stocks were down. So despite the normalpattern of people making new-year's resolutions and maybe putting in someyear-end bonus money, the net flows were negative early in the month forstock funds. The rally in the final week MAY have saved us from a minussign, but it will be pretty close. People are still very nervous aboutlosses!
Q. THINK LONG TERM should be the motto, maybe?
A. You've got it, exactly! Not maybe at all.
A: Thank you.
#
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).
To read more Interviews, please visit the column archive.
