Lipper Senior Research Analyst Don Cassidy on KTLK AM-760
Thursday, Jan. 23, 2003
Q. Well, Don, you folks at Lipper have toted up the final numbers on moneyflows for 2002?A. Yes, and it was not a very pretty picture.
Q. Maybe first we should start with the month of December, when the marketwas sliding gradually lower...
A. Sure.
Equity - 5.5 $Billion OUTflow
Bond - 4.2 $B INflow
Money Market - 37.2 $B OUTflow
Overall - 38.5 $B OUTflow
Q. So, another bad month....
A. Right, people finally became cautious buyers of equity funds again inNovember, for the first time since May, but seasonal weakness in Decemberplus the sliding market got them nervous and they were small net sellersagain. Even flows into bond funds, while positive, were the smallest ofthe year. Bond funds have had in flows for 22 of the past 24 months, eversince the fed started cutting rates in Jan 2001.
Q. SO how did it look for the whole year, then?
A. A pretty tough year unless you were a manager of or an investor IN bondfunds...Equity - 12 $Billion OUTflow
Bond - 131 $B INflow
Money Market - 48 $B OUTflow
Overall - 71 $B INflow which is the smallest since 1990for the industry.
Q. Wow, actually an outflow in equity funds for the whole year?!
A. Right, and it was the first time since 1988 that we've seen that.Coincidentally, the outflow in 1988 was also about $12 billion, but ofcourse as a percentage that was a lot more than currently. People THENwere still worried after the October 1987 crash.
Q. And this time it was the economy, the war build-up, and fears ofterrorism?
A. Exactly, and a pretty heavy load those three make -- plus you havepeople just stunned and badly hurt by their losses in a 31-month bearmarket in stocks, the longest since 1939-1941.
Q. Those BOND INFLOW numbers look pretty good, though...
A. Indeed. In fact last year was a record for inflows into bond funds,beating the roughly $120 billion inflow back in 1986. Of course on apercentage basis, again, the older number was bigger.
Q. With people yanking money out of stock funds, it seems littlesurprising that money funds, usually a parking space, ALSO had outflows.
A. It is an unusual combination, but there are probably 2 big reasons.First, rates on Money Market funds got so low in the second half -- under1% -- that people took their money elsewhere -- to bank CDs and toshort-term bond funds. 90% of the inflow in bond funds went to the short-and intermediate-term types, not the long-bond funds. And second, no doubtsome people just quit Wall Street entirely and took their money home or tothe banks, which would include closing their Money Market fund accounts.
Q. How did the local, Colorado, funds do?
A. Well, for the month of December we had an outflow of about $1.7 billion(or 30% of the national total) in equity funds. And for the year theequity fund outflows from our local groups were $16.4 billion, or more thanthe entire national total.
Q. Why IS that?
A. Well, we have a much more aggressive personality of equity funds hereon average, and conservative was in vogue. We just don't have many suchfunds, and people don't think of the big Denver names as where to go forcautious styles.
Q. I know that is the reputation. Well, what does the future look like to you, Don?
A. Not as bad as '02, but far from great. While the first quarter may notbe great, we think the stock market may be up 6-10% for the year of 2003.That will feel better, but it will take a while for people to regain theirnerve. While we expect positive flows into equity funds, it might be like$50 billion, very hard to see +100. The record was +270 in 2000. We thinkpeople have seen the light and are asset allocating, so we expect positivebond-fund flows, and we do not see interest rates rising until at LEAST thesecond half. But with stocks not falling off a cliff, the urgency toswitch into bond funds will be absent, so we think probably $50-70 billioninflow seems a fair estimate, well below this year's highs. And it's hardto see inflows into money funds with short rates so terribly low, sooverall we're looking at something less than $100 billion of net inflow tofunds. But the MIX will be more profitable than in 2002.
Q. What should people be doing now?
A. Asset allocate, so whatever happens will not run your entire wealth upor down at the same time. Start putting your toe back into theequity-funds pool even though the water still seems chilly. You don't haveto dive all at once, but getting in before you're totally comfortable meansyou will be in at lower cost and have greater profit over time.
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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).
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