Published August 20, 2011
INVESTING
The recent wide swings in the stock market have resulted in investor anxiety that may linger for years
(Boston)
LAST week's record volatility in US stocks ended after four days. The anxiety it instilled among mutual fund investors may linger for years.
UNNERVING ROLLER-COASTER RIDE
Investors, nervous about the volatility and seeming instability of the stock market, pulled a net US$23.5b from US equity funds in the week ended Aug 10
Investors pulled a net US$23.5 billion from US equity funds in the week ended Aug 10, the most since October 2008, when markets were reeling from the collapse a month earlier of Lehman Brothers Holdings Inc, the Investment Company Institute said on Wednesday. The period tracked by the Washington-based trade group included three of the unprecedented four consecutive days in which the Standard & Poor's 500 Index rose or fell by at least 4 per cent.
The roller-coaster ride was unnerving for fund investors who have already endured the bursting of the Internet bubble in 2000, a 57 per cent collapse in the S&P 500 Index from October 2007 to March 2009 and the one-day plunge in May 2010 that briefly erased US$862 billion in value from US shares.
The debacles, combined with falling home prices, unemployment above 9 per cent and a lack of trust in government to bring down spending, may sour individual investors on domestic stock funds for an additional three to five years, according to Andrew Goldberg, a market strategist at JPMorgan Funds in New York.
'You can't keep having bombs, so to speak, go off,' he said in an interview. 'If the second you walk outside another one goes off, you're going to stay inside for longer, and that's what's going on.'
The return of the S&P 500 during the past 10 years has been about 3 per cent including dividends. Investors have experienced 'a far greater degree of volatility than one would expect for such meagre returns', says Morningstar analyst Greggory Warren.
The US$12.2 trillion mutual fund industry has historically been able to count on investors to come back to stocks after a significant selloff. They did so following 'Black Monday' in October 1987, the Asian currency crisis in 1997 and Russia's debt default in 1998. In the year after the 2000-2002 bear market, US equity funds attracted US$130 billion, ICI data show.
Funds that buy domestic stocks lost US$98 billion in 33 straight weeks of withdrawals last year after the 20-minute plunge in May, ICI data show. They've had redemptions of US$74 billion this year. The latest withdrawal streak began in 2007 and didn't end even as stock surged from their March 2009 lows.
'What we have seen this time is a much slower return to risk-taking,' said Francis Kinniry, principal at Vanguard Group Inc in Valley Forge, Pennsylvania, the largest US mutual fund manager. He attributes the difference to falling home prices. In bear markets prior to 2008, residential property values were rising.
'There was significantly more wealth destruction this time around,' he said.
Investors have compensated by shifting some of their money into passively managed index funds and exchange-traded funds that track stock benchmarks, forsaking managers who select the investments they buy and sell.
US stock index funds have posted net deposits every year since 2001, according to Morningstar Inc, a Chicago-based research firm. Investors have similarly poured US$851.5 billion into ETFs for all asset classes from 2001 to July 2011. Unlike mutual funds, ETF trade throughout the day like stocks.
Bond funds also have been winners, adding US$75 billion in deposits this year, while funds that buy non-US stocks took in US$15 billion, according to ICI.
'Over the past couple of years and especially the past couple of weeks, I have heard a large number of clients and acquaintances express fear and dislike for the stock market,' Eitan Tashman, a financial planner in Beverly Hills, California, said. While 'many investors are scared of the volatility and seeming instability of the stock market and would even like to remove their money from the stock market', there are few alternatives, he said.
The post-World War II generation of baby-boomers is the largest group of investors in mutual funds, said Geoff Bobroff, an investment-management consultant in East Greenwich, Rhode Island. As they go into retirement, they might not return to equities after two bear markets and the volatility this year, he said.
'They are already thinking now about their retirement years,' Mr Bobroff said. 'They may be in fixed-income of different flavours, but equities may no longer be on their horizon.'
The recent volatility makes Mark Beller, 42, a physician in Northridge, California, want to put more of his money into real estate. 'The market is so volatile - 1,400 points in a week? Give me a break,' he said. 'I have money to invest, and my portfolio is down about 15 to 20 per cent, so I'm going to wait for it to come back to where I feel comfortable.'
Younger investors aren't replacing their retiring counterparts. Cash holdings are at the highest levels since the record in March 2009, according to an Aug 16 survey by Bank of America Merrill Lynch.
Investors aged 18 to 30 years have the highest cash position of any age group at 30 per cent of their portfolio, MFS Investment Management said in an Aug 8 report. Almost three in five investors cite fear about volatility or needing money someday as a reason they hold high or increasing levels of cash.
'Investors are in cash for a reason and, regardless of time horizon, conventional investing wisdom no longer applies,' William Finnegan, senior managing director of retail marketing at the Boston-based firm, said in the report. 'The Great Recession of 2008 has had a profound and longer-lasting impact on investors' confidence than expected.'
The average investor tends to hold large amounts of cash when the markets are at a low and thus miss out on gains, JPMorgan's Mr Goldberg said. The previous high of cash as a percentage of portfolios was in October 2002, right before the start of a five-year bull market.
'Households had become so conservative that they were sitting on all this cash that should've been seeking out opportunity,' he said. 'To the extent that emotions drive decisions, they're going to get it wrong.'
The return of the S&P 500 during the past 10 years has been about 3 per cent including dividends. Investors have experienced 'a far greater degree of volatility than one would expect for such meagre returns', Greggory Warren, a Morningstar analyst, wrote in a June 29 research note.
Still, not all investors are panicking or leaving the market.
'Generally, they're holding tight, and I've been pleasantly surprised,' Kevin O'Reilly, a financial adviser based in Phoenix, said in an interview. 'I haven't gotten, really, nearly as many calls panicking as I thought I would have.'
US investors may be getting used to the volatility, which isn't necessarily a good thing, said Lee Ann Knight, a financial adviser in Bedford, Massachusetts.
'They may be immune to worrying about it when they should be,' she said. 'What surprised me is that I have had a few phone calls from people wanting to use this opportunity to invest. That's great, that's good, but I feel like I had these conversations for 10 years, and people were like, 'No way, no way'.' -- Bloomberg
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