Inside The Mutual Downturn By Dunstan Prial Associated Press

Sat., Oct. 9, 1999

The amount of money invested in mutual funds in the first eight months of 1999 was down 15 percent from the first eight months of 1998. Through August of 1999, investors had put $112 billion into mutual funds, down from $132.3 billion a year earlier.

So what?

Well, the obvious answer is that if there’s less money going into mutual funds, there must be less confidence in the stock market. But it’s not that simple.

Cash flow into stock funds is generally viewed “as a proxy for the public’s sentiment of the stock market,” said John Collins, a spokesman for the Investment Company Institute, a Washington-based trade organization that tracks mutual fund information.

Furthermore, conventional wisdom holds that the amount of money going into mutual funds is directly related to whether the stock market goes up or down, given the huge amounts of cash investors now put into stock funds.

But the correlation between the flow of money into stock funds and the direction of the stock market is weak, according to Collins. “It’s not much of an indicator,” he said.

Only 20 percent of the total value of the stock market is held by mutual funds, Collins explained. The rest is held by institutions such as private pension fund managers, state and local government pension funds, banks and insurance companies, and wealthy private investors. Small, individual investors are also thrown into the mix.

The information is valuable primarily to the fund industry itself, analysts said. Fund companies like to keep track of where the money is going - or not going - in order to keep an eye on the competition.

On the other hand, some mutual fund managers blame the mutual fund industry’s dismal third quarter performance figures on the fact that less money was flowing into funds. And both of those dynamics, they argue, contributed to the 1,000 point, or 9 percent, decline in the Dow Jones industrial average during the same period.

Mutual fund analysts said three factors contributed to the third quarter downturn in fund performance: fears that the Federal Reserve Board would raise interest rates for a third time this year to keep inflation at bay; concerns that Y2K computer bugs could hurt companies’ ability to do business; and the dollar’s recent slide against foreign currencies, especially the Japanese yen.

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