Americans, Once Again, Miss Out on Stock Rally

BOSTON (TheStreet) -- It's going to take a lot more than yesterday's 3.4% gain in the S&P 500 Index to lure fed-up mutual fund investors back to the fold.

Americans have been in full flight this year, withdrawing $84 billion from U.S. equity mutual funds through Oct. 11 versus $83 billion for all of last year, according to TrimTabs Investment Research.

With yesterday's gain in the S&P 500, the benchmark index is up 14% this month, the biggest monthly increase since 1974. The reason for the rise was Europe boosting a rescue fund to 1 trillion euros ($1.4 trillion) while investors agreed to a voluntary writedown of 50% on Greece's debt.

The rebound came after September's steep decline, a month in which the combined assets of all U.S. mutual funds, including stock, bond, hybrid and money market funds, decreased by $582 billion to $11 trillion.

Investors have lost confidence in the markets due to their volatility, but the asset drop is also driven by a move to more cash-like investments and ETFs, said Leon Mirochnik, a TrimTabs analyst. "I don't think it's a loss of confidence in fund managers, absolutely not," Mirochnik said.

If the current trend of outflows continues, 2011 is likely to be the fifth consecutive year that domestic stock mutual funds have seen significant investor redemptions. Since 2007 through Oct. 11 of this year, investors have pulled $4.1 trillion out of such funds, according to TrimTabs.

They've been stampeding out of equity funds this year on the volatility caused by the European sovereign debt debacle, the weak economy and directionless public policy at home.

The typical individual investor has "an enormous amount of fear of the future and skepticism" about governments' ability to solve the economic problems plaguing the nation and Europe, said Adrian Day, founder and president of Adrian Day Asset Management, an asset-management firm based in Annapolis, Md., with clients who have investment portfolios that average about $750,000.

And that is coincident with the first wave of baby boomers entering retirement. Most have known relatively stable and rising equities markets in their personal investment histories, so the past five years has shaken their confidence in stocks, such that they've switched to ultra-conservative investments such as cash and bonds, and they're not looking back.

Bond funds have taken in $111 billion in new assets this year after gaining $246 billion last year and $376 billion in 2009, TrimTabs said.

There is also a major move by investors to exchange traded funds, which are cheaper to own and less volatile than stocks, and they offer the ability to buy and sell throughout the day, unlike mutual funds.

U.S. stock ETF assets are up $22.7 billion in 2011 after gaining $32 billion last year.

Unfortunately, if the current rally has legs, it will once again mean individual investors have missed out on big gains as they did in the big 2009 rally after the 2008 crash. The S&P 500 has soared 84% since March 2009.

So-called "mom and pop" investors have typically been slow to respond to early signs of sustainable rallies in the past, and it's likely they'll do it again and miss out on some of the biggest gains, Mirochnik said.

"Having some clarity on the whole European debt crisis is going to be a big factor" in getting the average investor back into U.S. equity funds, said Mirochnik, but it's likely to be a slow, drawn-out process.

Todd Rosenbluth, a mutual fund industry analyst at S&P Capital IQ, said the S&P 500's move back into positive territory this year bodes well for a sustained rally as investors tend to react to the benchmark index's moves. That could well get the investing public creeping back into stock funds.

And, he adds, stock mutual funds haven't lost their values as a good way for investors to diversify their investment portfolios.

Mirochnik said "there's still a lot of cash on the sidelines, so we could have a nice little rally in the next few months and into the first part of next year."