Lipper Senior Research Analyst Don Cassidy on KTLK AM-760

Thursday, December 18, 2003

A. Right. This morning. And the numbers are taking few interestingturns...

Q. Tell us more.

A. Well, we estimate inflows for November into equity funds at about $22billion. That's down from somewhat over $25 billion in October, butcertainly no small number!

Q. Do you have a sense of WHY it would be down? The stock market wasactually up in November...

A. Sure. The market was down for the first three weeks and then ralliedsharply in Thanksgiving week, ending with a small gain of less than 1% onthe S&P 500. Compared with the October gains of more like 3% on the majoraverages, there was less bullishness in November, and people's buying andselling decisions are definitely swayed by the very latest trends andmoods. Second, November is getting towards the holidays, and traditionallymutual fund flows are a little less robust in December and January, sothere's a seasonal thing at work.

Q. And don't you think that all the talk about the trading scandal --almost every day! -- has been a negative too?

A. Well, that's one of the interesting aspects. I suppose it HAS been anegative in a very small way, in that probably a few investors may havegone away in disgust and pulled out their money. But the numbers we areseeing say that rather than quitting, investors are just switching brandnames. If they are redeeming shares at Putnam and Janus and Strong, theyare buying funds at Fidelity, American Funds, Vanguard, andFranklin-Templeton. The six fund companies with the most negative mediastories in November had $20 billion walk away, but it seems to have stayedin the funds industry, just at different addresses.

Q. That IS surprising -- and good news for the industry.

A. Yes it is good news. I believe the reason is that the large majorityof funds investors are using funds because they do not want to try pickingindividual stocks themselves -- they lack the time and maybe the confidenceand don't like the added risk. And of course a lot of people have funds intheir 401(k) and similar plans at work, and they MUST stay in funds. Also,with the market doing very well in 2003, people are probably shrugging offthe bad news and enjoying the ride. It's a good thing this news did notbreak in the fall of 2002 rather than now!

Q. OK, so equity funds are taking in a lot of money. How about Bond andMoney funds?

A. We estimate small outflows on balance in bond funds -- about $2 billion-- for November. That's the smallest outflow since July. The shock of therise in interest rates is over and rates are going sideways gain. Formoney funds, we show an outflow of about $3.5 billion in November -- thesmallest leakage since July, but November is normally a seasonally strongtime for balances to build up in these funds. LAST year we had over $125billion go INTO money funds in November, so the present number (firstNovember outflow since 1992) is no comfort at all.

Q. Low interest rates?

A. That's clearly a big part of it. But also, stocks are doing well sosome money is dribbling back into the market from money funds where it wasparked.

Q. So, how do the numbers look for 2003 to date?

A. Assuming December holds up for the final 2 weeks, we will see a netinflow of right around $200 billion into equity funds, which would besecond only to the all-time record set in 2000. We almost surely will hitat least # 2, since 1999 saw $175 billion come in.

Q. Those numbers sound awfully big...

A. They are, but if you break it down to a per-person basis it is notreally a lot. $200 billion would be a little short of $700 for every man,woman, and child in the country. If you count ACTUAL fund investors, thereare about 93 million, so it is a little over $2,000 per participant. Noteven enough to fully fund a Roth IRA! So people probably still have a lotmore to do, to fund their retirement plans adequately.

Q. Can you talk a little about WHAT KINDS of funds have been getting themoney, Don?

A. Sure. And that's where we are starting to see some shifts. For a longtime we have been saying people were pretty cautious. We still see that,with over $2 billion a month going into Balanced Funds and so on, but weare now also seeing some more aggressive choices.

Q. Examples?

A. World Equity funds got almost $5 billion of new money again in November.Part of that is a play on the weak dollar, but it takes a confident oraggressive mindset to feel able to send money overseas. And Sector fundsgot 20% of the net new equity-fund money. Part of that is gold and REITfunds, but Technology funds popped up with a $750-million inflow, which wasmore than their net intake for the first 10 months and their largest singlemonth since late 2000. Technology fund took in more than Real Estate fundsfor the first time in a LONG while.

Q. So, are people starting to chase performance again?

A. Some people are, although not yet to the manic degree we saw in 1999and early 2000. We see the present pattern as showing two clusters ofpeople: the cautious ones who are still preferring value over growth, andbuying balanced and income funds and REIT funds, -- but then also somehot-money people who are chasing the hot groups like technology, gold,Latin America, Japan and China, and so on. So there is starting to be alittle excitement visible in the trends.

Q. Where do you see it going in December and next year?

A. Well, if the market holds up for 2 more weeks, we will have niceinflows of maybe $20 billion in stock funds in December. And assuming thebull market chugs along into 2004, we could well see record flows for thenew year.

Q. Will that help the market a lot?

A. Only marginally, really. Equity funds own only about 1/6 of the stocksin the U.S. market, so we are talking maybe less than 2% net new moneygoing into the market. Better than 2% coming out, but hardly a torrent.

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Don Cassidy is a Senior Research Analyst at Lipper specializing in fund flows, exchange-traded funds, (ETFs), closed-end funds, equity fund performance, and author of Trading on Volume (McGraw-HIll).