For most mutual fund investors, about the only nice thing that can be said about the summer of 2001 is that it ended.
What began as a quarter of worry over a wobbly economy and rocky corporate earnings ended with 99 percent of equity funds in the red.
"The last three months have been some of the most difficult conditions I have experienced in managing money in the last 20 years," said Thomas Marsico, portfolio manager and president of Marsico Funds, with US$11 billion under management.
Major stock market indexes were down before terrorists attacked the World Trade Center and the Pentagon, and so were equity funds: the average stock market mutual fund was down nearly 12 percent from the end of June through Sept. 10.
The selling after Sept. 11 made matters much worse. For the quarter, the average diversified mutual fund fell 16.22 percent, according to Morningstar Inc. It was the biggest three-month decline since the fall of 1987.
Perhaps more important, the decline meant that diversified equity mutual fund values have now fallen in four of the last five quarters. The last period of comparable contraction was in 1983-84, according to Lipper Inc., the research firm.
The market's free fall left few stocks unscathed. Only bear funds, which short the market, and precious-metals funds, which rose 3.18 percent, showed an increase.
Science and technology funds, which have been falling since March 2000, when the Nasdaq composite index peaked, had their worst quarter ever, falling nearly 39 percent, according to Morningstar. Growth funds fell 22.9 percent, on average, with value funds down 12.4 percent.
Confronted with uncertainty and loss, many investors chose not to panic and run for the exits, but to seek safety and stability.
Extrapolating weekly fund flow numbers from AMG Data Services, Thomas McManus, chief investment strategist at Banc of America Securities, estimated late last month that net redemptions from domestic equity funds totaled US$21 billion in the third quarter, the first negative quarter since the summer of 1990, when Iraq invaded Kuwait.
While that US$21 billion is significant McManus said, it needs to be put in context.
"In 1990, net outflows from domestic equity mutual funds totaled US$4 billion," he said. "But assets back then were US$196 billion. At the end of August there was nearly US$2.9 trillion in all domestic equity funds."
Money coming out of equity funds was redirected into bond funds and money market funds. In August alone, bond funds had inflows of US$15 billion; an additional US$24 billion went into money market funds, according to Lipper.
"Investors are deciding to reallocate, and not exit the financial system," said Robert Adler, president of AMG Data Services.
At the Vanguard Group, the mutual fund company with US$530 billion in assets, net outflows from equity funds in September totaled US$1.3 billion, said Brian Mattes, a spokesman. But Vanguard had net inflows of US$2.3 billion in the first two months of the quarter. Last month, Vanguard bond funds had US$1.8 billion in inflows, Mattes said, on top of US$5.1 billion in inflows in July and August.
Helped by the continued decline in interest rates, bond funds eked out positive returns for the quarter. The average taxable bond fund was up 1.6 percent for the last three months, according to Morningstar, while municipal bond funds gained 2.57 percent, on average.
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