Large exodus from stock funds attributed to product switch: ICI

By Trevor Hunnicutt

NEW YORK (Reuters) - U.S.-based stock mutual funds reported the largest outflows in five years, Investment Company Institute data showed on Wednesday, adding to a poor year of sales for the funds.

Some $16.9 billion moved from stock mutual funds in the seven days through Oct. 19, more than in any other week since August 2011, the trade group's data showed.

By contrast, stock exchange-traded funds took in $2.4 billion. ETFs mostly "passively" track market indexes, while the mutual funds largely employ "active" managers who pick stocks.

The result can be attributed in large part to the conversion of some mutual funds to another investment product, ICI spokesman Matthew Beck said, though he declined to provide details.

Mutual fund companies have shifted money into collective investment trusts not regulated by the U.S. Securities and Exchange Commission in an effort to cut fees.

CITs can only be offered to qualified retirement plans such as 401(k)s, and analysts said their less stringent reporting requirements translate into lower operating expenses for fund companies.

The latest data is another somber development for stock mutual funds which, despite strong markets, are on pace to record a year of withdrawals comparable with the 2008 peak of the global financial crisis.

The S&P 500 index, including dividends, is headed to its eighth year of positive returns.

"The trend to passive ETFs has persisted throughout the year," said Todd Rosenbluth, director of ETF and mutual fund research at CFRA. "Active funds have failed to keep up with common benchmarks this year, and investors are looking for lower-cost alternatives."

The outflows from stock mutual funds come ahead of the Nov. 8 U.S. presidential election and a potential interest-rate hike by the Federal Reserve that could push equities lower.

"Investors sharply rotated out of large- and mid-cap mutual funds last week, just as the start of earnings season kicked off," said Rosenbluth.

Even though overall earnings of S&P 500 companies are now expected to snap a four-quarter streak of declines, according to Thomson Reuters I/B/E/S, that was not enough to soothe fund investors.

U.S.-based bond mutual funds and ETFs attracted $6.3 billion in their 16th consecutive week of inflows, ICI said.

The following table shows estimated ICI flows, including ETFs (all figures in millions of dollars):

10/19 10/12 10/5 9/28 9/21/2016

Equity -14,475 -4,093 -11,836 4,257 -4,385

-Domestic -14,607 -4,523 -8,861 7,899 -2,901

-World 132 430 -2,975 -3,643 -1,483

Hybrid -1,241 -1,768 -1,539 -507 -541

Bond 6,334 1,787 9,140 7,781 6,466

-Taxable 6,294 1,487 8,207 6,663 5,586

-Municipal 40 300 933 1,118 880

Commodity 404 228 -105 325 533

Total -8,977 -3,846 -4,340 11,856 2,074

(Reporting by Trevor Hunnicutt; Editing by Lisa Von Ahn and Lisa Shumaker)

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