Foreign Funds Out, Bond Funds In as Mutual Investors Shift Assets

Redemptions of mutual fund shares jumped sharply in October as the stock market tumbled, but the net inflow of cash to stock mutual funds still was significant, an official tally of fund industry trends released Tuesday shows.

But international stock funds saw heavy outflows, and that has continued this month, many fund companies say.

The October activity report from the Investment Company Institute, the funds’ main trade group, showed that total new purchases of stock and bond mutual fund shares rose 6% in October from September, to $80 billion.

But redemptions of fund shares jumped 22% from September, to $52.9 billion, the ICI said.

The surge in redemptions slashed the net new cash flow into stock funds to $18.2 billion for the month, down 29% from September’s $25.8 billion.

Net new cash flow measures fund purchases less redemptions, adjusted for exchanges among funds in the same families.

Bond funds, meanwhile, had net new cash flows of $3.7 billion in October, down slightly from $3.9 billion in September, the ICI said.

Bond funds have taken in an average of $2.8 billion a month this year, up sharply from $886 million a month in the same period of 1996.

“Bond funds are becoming more popular as investors look to reduce risks and their exposure to the equities markets,” said Ralph Greggs, senior vice president of product development at Boston-based New England Funds.

Still, short-term money market funds, viewed as a super-safe parking place for money, took in far more than bond funds in October. Money funds received $17.6 billion in net new cash, versus a $7.8 billion outflow in September.

The weakest segment of the stock fund business is international. Roiled by the collapse of currencies and stock markets across Asia, many international stock funds saw their values tumble in October--causing more investors to bail out.

The ICI said international stock funds had a net cash outflow of $583 million in October, the first monthly outflow since October 1995.

Gross new purchases of international funds rose just 2% from September, to $7.4 billion, while redemptions surged 31%, or $1.5 billion, to $6.6 billion.

Even as some investors are redeeming shares, new purchases continue to be made through many automatic savings plans, such as corporate 401(k) retirement programs, analysts note.

So far in November, mutual fund investors continue to pull cash from international stock funds, while they also are slowing their buying of U.S. equity funds and increasing their purchases of less-risky bond funds amid turmoil in world financial markets, many fund companies say.

Companies such as T. Rowe Price Associates Inc., Charles Schwab Corp. and Scudder, Stevens & Clark Inc. are reporting net withdrawals for a second straight month from international funds.

“Investing in international markets these days takes a lot of courage,” said Ian Wilson, editor of Micropal Emerging Market Monitor in Richmond, Va. “Just when you think things are settling down in Asia, violent swings begin again.”

As for funds that concentrate investments in U.S. stocks, the pace of buying is about $3.2 billion a week so far in November, down from nearly $5.1 billion a week in September, according to Trim Tabs Financial Services Inc.

Vanguard Group, the second-biggest U.S. fund company, said net inflows to its stock funds have totaled about $1.4 billion this month, which is about half what went into these funds last month.

But stock fund buying is “generally lower” in November for tax-related reasons because investors tend to delay fund share purchases until funds distribute taxable gains, said Vanguard’s John Woerth.