Newspaper article The Christian Science Monitor

Hot Mutual Fund Sales Are Starting to Cool BOND MARKET

Newspaper article The Christian Science Monitor

Hot Mutual Fund Sales Are Starting to Cool BOND MARKET

Article excerpt

THE torrid pace of mutual fund sales during 1994 has begun to slow, reflecting investor concerns about the direction of the United States economy and higher interest rates. On Friday, treasury prices jumped sharply after the government reported that the economy grew at a fast 3.4 percent rate in the third quarter. But many analysts say it is too early to expect a sustained rally, especially in the bond market.

The question now is whether the slower pace in mutual fund sales will continue, putting downward pressure on stock prices, and whether slower sales will lead to total net redemptions in mutual funds, where more assets are withdrawn from funds than added.

The fixed-income side of the mutual fund ledger - bond funds - has been experiencing net redemptions since March. Could that pattern extend to equity funds as well?

The most recent sales data suggests there has been a shift in investor sentiment in the US. Total sales of mutual funds, including bond and equity funds, fell to $35 billion in September from $37 billion in August, according to the Investment Company Institute (ICI), a Washington trade group. Looking back at last year's sales, the drop is even more pronounced. Total sales were $43 billion in September 1993.

Withdrawals from bond funds are increasing significantly. In September, the outflow reached $4.8 billion, the highest level since March. In August, $2.8 billion was withdrawn. Meanwhile, sales for equity (stock) funds were up $8.1 billion in September. But the pace is down sharply from earlier this year. In August, sales of stock funds were $11 billion.

While few investment firms and mutual fund companies are willing to openly discuss the possibility of net redemptions in equity funds, there is anecdotal evidence that some of these companies are modestly increasing cash positions.

The increase in cash is indicative of their need to stand ready to meet higher levels of redemptions, and to have cash on hand to take advantage of buying opportunities later in the year, in case the market shifts. …

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