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Investors are net buyers of U.S. stock funds for first time since spring

December 29, 2010 |  4:49 pm

U.S. stock mutual funds last week had their first net cash inflow since April -- a sign that small investors are finding the equity market’s powerful rally since August too much to ignore.

Domestic stock funds took in a net $335 million in cash in the seven days ended Dec. 21, the Investment Company Institute said Wednesday.

The amount was a pittance compared with domestic stock funds’ total assets of almost $4 trillion, but it’s the possible shift in the trend that counts: The funds as a group had suffered net cash outflows every week since the first week of May.

Those outflows totaled nearly $100 billion from May 5 through Dec. 15, ICI data show. An outflow means redemptions by investors selling their fund shares exceed new money coming into the funds.

The net inflow last week could mean that redemptions slowed sharply or that more investors were stepping up to buy, or some combination of the two.

Either way, the change will be welcomed by fund managers who naturally would always prefer to have cash coming in than going out.

Another sign of investors’ rising appetite for equities: Foreign stock funds took in a net $3.6 billion in the seven days ended Dec. 21, the largest weekly inflow in three years. Foreign funds have mostly had net cash inflows this year even as investors sold domestic funds.

The rising cash flows to stock funds come as U.S. market indexes hit their highest levels in at least two years, buoyed by many signs of an improving economy (excluding housing). The Standard & Poor’s 500 index is up 13% this year. The Nasdaq composite index is up 17.5%.

Stocks also are benefiting as some investors shift money out of bonds, after a jump in interest rates since September devalued older fixed-income securities and drove down share values of bond mutual funds.

Taxable and tax-free (municipal) bond funds had a total net cash outflow of $4.37 billion in the seven days ended Dec. 21, the third straight weekly decline, though the outflow slowed from $8.6 billion the previous week, ICI said.

-- Tom Petruno