Lipper Research Senior Analyst Don Cassidy on "Business for Breakfast" 1060 KRCN - Big Inflows Into Funds in January

A. They were quite strong when you look at the surface totals and still notbad when you dig in deeper.

Q. Details?

A. Stock and mixed-equity funds had net inflows of over $31 billion inJanuary, about the same as in January 2004?right after the big marketrebound of 2003. Bond funds had inflows of about $6 billion, which was apretty healthy month there as well.

Q. January and January?is there a seasonal pattern there?

A. Definitely. Historically, the first quarter of the year is the bestquarter for net flows into mutual funds, and January itself is often thebest month of the year.

Q. Why is that?

A. Several factors are at work:

• First months of quarters get a lot of inflows of pension andprofit-sharing money.

• January is annual-bonus time for many workers.

• January is new-year resolutions time for people (?going to get serious about retirement plans!?).

• There is reinvestment of late-December fund dividends.

• January is the first time people can contribute to the newyear?s IRA plans.

• January starts the contribution cycle over again for 401(k) andsimilar plans.

Q. So, you would expect pretty good numbers for the month, then!

A. Right. And unless the prior year has been a very nasty one forinvestors, you generally do see big numbers for January?

Q. Now, you mentioned ?below the surface?; can you elaborate on that?

A. Well, some are the nonrecurring seasonal reasons I just mentioned. Butalso, in this case we saw that over $23 billion of the stock fund inflowswent into funds invested overseas. You can call that ?performance chasing?or whatever, but it does not exactly represent a ringing vote of confidencefor the domestic market! And another thing, we saw a fairly high componentof institutional money going there, so it is not as though households werewriting huge checks.

Q. What other kinds of funds were people buying, Don?

A. It was very interesting. Clearly, they were putting money into areasthat have done well in the past year or two?an old January pattern: Japanfunds, gold funds, big money into natural resources funds (which own a lotof oil stocks), and the surprise was a turn to growth funds.

Q. Really? I remember that for a long time people have been buying valueand core funds?

A. Exactly right. So there is some degree of new bullishness there, but Ithink a lot of it may be that people were hearing all the year-end talkwhen the ?pundits? were calling for a shift from value to growth and ashift from small-cap to large.

Q. So, did investors also go for large-cap funds in January?

A. No. There were net outflows of a few billion dollars there. That ofcourse is an area where a lot of money and opportunity have been lost since2000, and those investors are still taking tax losses and still areskittish about returning with new money.

Q. You did not mention real estate funds a minute ago?

A. Right. They had a very slight net outflow in January. I believe thatreflected people not taking their big profits until the old tax year wasover. Real estate funds have been up six years running, and the fasteraction lately has been in oil and gold and overseas markets.

Q. How about flows of bond funds? I thought everyone was afraid of ratesrising?

A. You are correct. The big flows are going not into plain-vanillalong-bond funds but instead into specialty types of bond funds, likeinternational, municipal bond, intermediate-term, TIPS, and corporates.Government long-term funds (and high-yield taxables) actually had netoutflows. So, people are very aware of maturity or curve risk, and theywere choosing other things accordingly.

Q. What do you see as the likely trend for February?s flow numbers?

A. Considerably smaller, since:

• We do not have the cluster of January seasonal plus influences.

• The stock market has marked time and been more choppy since January 11, rather than being on the heels of a strong three-month rally as it was last month.

• February is traditionally a below-average month, since investors do a lot in January and then start managing cash to pay their taxes by April.

Q. How does the 401(k) picture fit into all this?

A. By the best estimates we see, it seems net inflows into stock funds arein the range of $9 billion to $10 billion a month. So, anything above orbelow that represents true current one-time decisions. A total of $31billion is quite good, but don?t dream of annualizing it!

#

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).