| by Lita Epstein, MostChoice.com Many analysts expected the mutual fund industry assets to decrease in 1999. It did not happen. In fact, mutual fund assets increased 24% to $6.8 trillion in 1999, according to the Investment Company Institute. Approximately one-quarter of that growth can be attributed to new net investments, but most can be attributed to growth from investment performance. Equity funds had the greatest increase in net flows, while other major investment objectives experienced a decrease. The only other type of fund whose assets increased were money market funds. Equity Funds
Equity funds increased the most in 1999, adding 36% with total deposits of $4 trillion. Eighty percent of that gain can be attributed to fund performance. New net cash flow rose by $188 billion or 19%. During the first quarter, new net flows in 1999 were at their lowest level since 1995, leading to speculation that the interest in mutual funds was waning. New deposits picked up steadily beginning in the Spring. By December, new net flow for 1999 in equity funds was second only to the record set in 1997. The concentration of these new funds within only 10% of domestic equity funds was unique to 1999. This top 10% received $286 billion, while 90% percent of equity funds got the remaining $109 billion outflow. Only 58% of equity funds had a net inflow, the lowest percentage since 1990, when only 55% had a net inflow. Bond Funds
Bond funds were hit the hardest in 1999. They experienced net cash outflow of $5 billion. The total deposits in bond funds fell 3% to $808 billion. The increase in interest rates can be blamed for lowered bond fund returns. Investors experienced a 1% increase on taxable bond funds and a minus 3.8% decrease in tax-exempt bond funds. The first quarter for bond funds looked good. Net cash flow in the first quarter totaled $19 billion, but then the bottom fell out. Investors quickly shifted their attention as interest rates rose. Monthly net outflows from bond funds for the last three quarters of 1999 were a negative $24 billion. Municipal and government bond funds continued their consolidation, which began in 1995. For the fifth year in a row the number of funds declined. Municipal funds dropped from 900 to 888 and government bond funds dropped from 395 to 379. Money Market Funds
Money market funds experienced their second highest annual flow on record in 1999, amassing $194 billion in new net cash flow. Net inflow for retail money market funds of $82 billion was second only to 1998 deposits which totaled $131 billion. The rest of the new money went to institutional money funds. The institutional funds did not experience their seasonal outflow in the second half of December, which helped to boost these results. Institutional funds usually experience the outflow as corporate accounts pay year end tax bills and shift to money market instruments near year end. Speculation is that this did not occur because the Federal Reserve kept overnight interest rates from rising at yearend. This kept overnight interest below yields on many institutional money funds during the last week of December. Companies may also have kept funds more liquid assets in case of computer problems at the turn of the century. Hybrid Funds
Hybrid funds, which mix all three types of assets - cash, bonds, and stock - suffered a similar fate to bond funds. While they experienced a moderate increase in assets of 5% or $384 billion, the net outflow for this fund type was $12 billion. The small increase in asset growth can be credited to fund performance from the stock side of the portfolio, while the bond side declined. The negative outflow began in the summer of 1998 and continued through most of 1999. New sales remained about the same for the year, but there was an increase in redemptions. Hybrid fund withdrawals increased by $17 billion to a total of $72 billion in 1999. Were Funds Impacted by Y2K?
Did all the worry over Y2K impact mutual fund assets in 1999? Many analysts feared it would, but in reality the Y2K scare seems to have benefited sectors of the mutual fund industry and had no noticeable impact on others. Equity funds and money market funds actually seemed to benefit from all the uncertainty. In fact the net inflow into equity mutual funds was its strongest in the last quarter of 1999 totaling $64 billion, which was the highest since the third quarter of 1997. This is atypical to the usual seasonal slowdown in the fourth quarter. Mutual fund investors tend to avoid new purchases during this quarter to avoid capital gains distributions and the taxes they incur. Money market funds were the other fund type that seemed to benefit from the Y2K panic. In order to be certain cash availability was strong, the Federal Reserve kept overnight interest rates low. This kept yields on overnight money market instruments below the yields of money funds. Therefore, money market funds did not experience their annual seasonal drop at the end of December. It seems the Y2K bug actually benefited the mutual fund industry. |
