The prediction, from analyst Kevin McDevitt at mutual-fund tracker Morningstar, comes after July's $22.9 billion in outflows, the most since the peak of the credit crisis in October 2008, when investors pulled $28 billion from U.S. stock funds. "With August off to a very rocky start, this trend is sure to continue with deeper outflows to come."
Investors have withdrawn a net $200 billion from U.S. stock mutual funds over the past five years. Total fund industry assets peaked at $4 trillion in late 2007, but the subsequent stock-market crash a year later, the prolonged recession and last year's so-called flash crash have contributed to skittish investor behavior that has resulted in outflows of about $500 billion since the peak, according to Morningstar.
That's roughly equivalent to the assets of the seven largest U.S. mutual funds, a list that includes Pimco Total Return, SPDR S&P 500 ETF and Fidelity Contrafund.
Outflows in June and July came despite the fact that most diversified U.S. stock funds declined an average of only 6% in the three months through July, so it wasn't the market performance that drove them away.
"It's taken less and less to spook investors over the years," McDevitt said, and the prospect of the threat of the U.S. defaulting on its debts which began to gain credence at the end of July because Congress couldn't agree on a debt ceiling was enough for many of them to throw in the towel.
"Investors' tolerance for uncertainty and risk has really changed," he said, and most of the money that has been coming out of U.S. stock funds won't be coming back, he said.
In previous stampedes out of U.S. stock funds, investors slowly returned, but McDevitt said it could be different this time because there have been a series of "structural shocks" to the financial industry that are not cyclical in nature, as in previous downturns that came with a bear market or a technology-stock bubble as seen early this decade.
"The implications are serious" for the mutual fund industry, he said.
And those same investors don't put much trust in U.S. money market funds either -- usually the safe place to park cash -- which are down $223 billion this year. They are opting instead for bank savings accounts or certificates of deposit, despite the paltry rate of interest they pay, because of the safety and liquidity.
Still others are investing in U.S. Treasury and foreign bonds, while some with a higher tolerance for risk are investing in international equity funds.
Those investors eschewing money market funds, once considered one of the safest havens in a period of volatility, likely remember the liquidity crisis in the fall of 2008. At the time, some money market funds struggled to maintain their $1 net asset value.
The big winner this year has been taxable bond funds, which saw $102 billion in inflows through July, putting the sector on pace with last year's increase of $217 billion.
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