Mutual funds attract record amount of cash in 1Q

[April 11, 2013]  BOSTON (AP) -- The stock market hit a record high during the first quarter, and so did the flow of cash into mutual funds.

Stock funds and bond funds attracted a combined $193 billion in the first three months of 2012, industry consultant Strategic Insight said on Wednesday. That tops the previous record of $140 billion in net deposits during the first quarter of 2007.

It also was a record when factoring in exchange-traded funds, which hold less cash than mutual funds but are growing at a faster pace. Net deposits into conventional mutual funds and ETFs totaled $246 billion. The previous record of $173 billion was set in last year's first quarter.

This year's figures suggest that investors are getting comfortable with stocks again following the financial meltdown and market plunge of 2008-2009.

Withdrawals from U.S. stock mutual funds exceeded deposits for the past six years in a row, while bond funds attracted more than $1.3 trillion in net deposits. This year investors have added $48 billion to U.S. stock mutual funds and $60 billion to funds investing in foreign stocks.

Deposits into stocks helped push the Dow Jones industrial average toward a record reached on March 5, and the market has since pushed higher. A broader index, the Standard & Poor's 500, has risen 11 percent this year and also is at a record high. Investors have been encouraged by strong earnings reports, improvement in the economy and housing market, and by the Jan. 1 agreement between Congress and the White House to avert the worst effects of the fiscal cliff.

Avi Nachmany, Strategic Insight's research director, said two trends appear to be playing out. Investors are becoming less risk-averse and adding cash to stocks. And cash is being shifted from low-risk investments like money-market mutual funds to relatively conservative income-generating investments like bonds and dividend-paying stocks.

"As investors move from the sideline, we observe two great rotations in parallel, and both should persist," Nachmany said.

Here are more details about how investors moved their money in March, according to Strategic Insight:

U.S. STOCK FUNDS: A net $13 billion was added to these funds, compared with $9 billion in February and $26 billion in January. It's a big shift from 2012, when withdrawals exceeded deposits over the final 10 months of the year.

FOREIGN STOCK FUNDS: Investors this year have been adding more cash to funds investing in foreign stocks than they have to U.S. stock funds, and the trend extended into March. A net $15 billion was deposited into funds primarily investing in international stocks, down from $22 billion in February.

BOND FUNDS: The huge cash haul of recent years into bond funds shows no sign of ending. Net deposits totaled $20 billion in March, compared with $23 billion in February and $42 billion in January. Bonds typically generate smaller long-term returns than stocks but with less chance of short-term losses. Even with currently low yields, bonds are expected to continue to attract retiring baby boomers and others who want reliable income.

EXCHANGE-TRADED FUNDS: Investors in March deposited a net $15 billion into ETFs, which bundle together investments in a particular market index. That's up from $8 billion in February. A net $12 billion was deposited last month into ETFs investing in U.S. stocks, while a net $2 billion was withdrawn from foreign stock ETFs. About $4.9 billion was added to ETFs investing in bonds.

Unlike mutual funds, ETFs can be traded during daily sessions just like stocks. They have attracted more than $100 billion in new cash for the past six years in a row, growing at a far more rapid pace than mutual funds. However, assets in mutual funds are still about seven times larger than the total in ETFs.

[Associated Press; By MARK JEWELL]

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