$44.8 BILLION YANKED OUT OF STOCK FUNDS DURING JANUARY
Investors pulled $44.8 billion from stock funds in January, according to the Investment Company Institute. That’s the second-biggest outflow in a single month, after July 2002.
Meanwhile, they poured $24.3 billion into safer bond funds. January marked the seventh consecutive month that money flowed out of funds that buy “value” stocks, the longest stretch since the 1980s. That is “probably reflecting fear regarding financial stocks,” Citigroup stock strategist Tobias Levkovich says in a research note.
Levkovich also says the data indicate hedge funds may have made a big blunder in December. They are big investors in exchange-traded funds, most of which invest in stocks. Flows into such funds increased “just before the difficult start for markets this year,” he says.
“Value traps” on the cheap
Picking through the dustbin of beaten-down stocks can be treacherous, says Merrill Lynch analyst Savita Subramanian.
“Valuation in a vacuum is the worst way to pick a stock,” she says. “You want to have some kind of positive momentum behind the industry.”
Sectors with low price-to-earnings ratios can be “value traps,” she says. Stocks in the insurance, semiconductor, airline, consumer finance, capital markets and diversified financial sectors sport attractive P/Es, but their share prices and earnings per share prospects are declining faster than the broader market.
“Where there’s no bottom in fundamentals and prices are declining, those are typically pretty grave signals, no matter how cheap the stock or industry looks,” she says.
Study: Briefer prospectuses led investors to lower-cost funds
A fund-picking experiment suggests investors may choose funds with lower costs when given shorter prospectuses to review. The lower a fund’s costs, the higher the investor’s return. The results could help sway the Securities and Exchange Commission as it weighs the industry’s response to its proposal to change the way funds are marketed.
Under the rules, shareholders would receive plain-English, three- or four-page fund summaries. Lengthier prospectuses would be available on the Web or, if requested, by mail. Prospectuses can run dozens of pages. (American Funds Growth Fund of America, the largest fund, has a 40- page prospectus.)
The researchers asked 300 university staffers to invest $100,000 each in stock funds and bond funds. Those given short summaries chose bond funds that cost 0.4 percentage points less than those given prospectuses, a statistically significant difference. The difference in stock funds, of 0.1 points, was less.
The academics gave the summaries their blessing, saying they “will create modest downward pressure on fees.”
