INVESTORS have been fleeing stock funds in droves, moving their money into bond portfolios, the headlines tell us. But while there is some truth in these reports, they don’t provide a complete picture.
Yes, a flood of money — more than half a trillion dollars since the beginning of last year — has been pouring into bond funds as investors have gravitated toward less risky assets in the wake of renewed market volatility. But not all stock funds have been neglected.
So far this year, on a net basis, more than $11 billion has actually gone into funds that focus on shares of companies based in the emerging markets, according to the Investment Company Institute. And an additional $17 billion has been invested in other foreign equity funds, including those that specialize in the developed markets of Western Europe and Japan.
In fact, upon closer examination, one major type of equity fund has been bleeding most of the assets: domestic stock portfolios.
According to the latest figures from the institute, funds that invest primarily in stocks based in the United States have had net outflows of nearly $30 billion this year, after losing nearly $40 billion in 2009.
This has some market watchers baffled.
“I certainly understand the popularity of the emerging markets,” said Michele Gambera, head of quantitative analysis at UBS Global Asset Management in Chicago, noting that many investors favor this asset class because developing economies in countries like China and India are expected to outpace the global growth rate.
But he says it is odd that fund investors who are turning their backs on domestic stocks are simultaneously embracing foreign funds that focus on developed markets.
After all, a big reason for concern about the global economy is a slowdown in Europe, prompted by its debt crisis earlier this year. So far this year, the Morgan Stanley Capital International EAFE index (for Europe, Australasia and the Far East) is down by nearly than 7 percent, while the Standard & Poor’s 500-stock index of blue-chip domestic shares is off by less than 1 percent.
These choices may have less to do with investors’ appetite for European stocks and more with entrenched anxieties about the markets in the United States.
David R. Kotok, chief investment officer at Cumberland Advisors, said the recent fund flow data validated “the distrust of Wall Street and the stock market by the large class of the investing public that uses mutual funds.”
After the financial crisis inflicted traumas on Wall Street titans like Lehman Brothers and the American International Group, as well as industrial stalwarts like General Motors and Chrysler, some wariness of domestic equities is to be expected, Mr. Kotok said. “Investors are having a form of financial post-traumatic stress disorder,” he said.
To be sure, the markets have made up a significant portion of what was lost in the 2007-9 bear market, with the S.& P. 500 up more than 60 percent since the market lows of March 2009.
But Mr. Kotok said that the financial crisis was no ordinary Wall Street panic, and that domestic stocks didn’t suffer just a short-term scare. Investors are in the midst of a rare 11-year span in which the S.& P. 500 has lost ground, thanks to not just one but two bear markets.
As a result, he said, “the scars are deep, and it may take a decade for investors to fully recover.”
There is a precedent for such a slow recovery in investor trust.
“We’re basically seeing some parallels to what happened after the back-to-back bear markets of 1969-70 and 1973-74,” said James B. Stack, a market historian and editor of the InvesTech Market Analyst newsletter in Whitefish, Mont. “What we saw as a consequence was an outflow of money from stock funds for the remainder of the decade of the 1970s.”
In fact, even though stocks experienced a strong bull run from 1982 to 1987, it really wasn’t until the early 1990s when domestic stock funds began to see huge amounts of new money flow in.
This time, the single-minded devotion that investors once had for domestic stocks may never return. “I can remember being on a panel at an investment conference in 1998 when an investor came to the mike and asked, ‘Why should I bother owning anything besides an S.& P. 500 fund?’” said Kevin McDevitt, a Morningstar fund analyst. “That was a fairly common view at the time.”
But Mr. McDevitt said that another factor driving money away from domestic stocks — and toward foreign equities — was the growing belief among investors that they had been underexposed to foreign stocks for far too long.
At the end of the 1990s, for example, many financial planners were recommending that investors keep a minority of their stock portfolios in foreign shares — say, 10 to 20 percent. But today, it is fairly common for advisers to recommend keeping as much as a third or half of one’s equity stake in overseas shares and funds.
THAT may be, but Mike Scarborough, president of Scarborough Capital Management in Annapolis, Md., thinks that investors aren’t necessarily acting because of a rational shift in strategy. Many people are probably looking in the rearview mirror and seeing better returns overseas than in the domestic market over the past 5 and 10 years.
He added that if the poor performance of the S.& P. 500 persisted this year, it might be a very long time before domestic stocks fully regain their reputation.
“It’s like car buyers’ perceptions of American autos,” Mr. Scarborough said. Despite recent studies showing improvements in quality among vehicles made in the United States, “some people treat American cars like it was still 1985,” he said.
He added: “I think without question what happened to Detroit could happen to Wall Street.”
Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.
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