(Bloomberg News) Last week's record volatility in U.S. stocks ended after four days. The anxiety it instilled among mutual-fund investors may linger for years.
Investors pulled a net $23.5 billion from U.S. 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 yesterday. 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 percent.
The roller-coaster ride was unnerving for fund investors who have already endured the bursting of the Internet bubble in 2000, a 57 percent collapse in the S&P 500 Index from October 2007 to March 2009 and the one-day plunge in May 2010 that briefly erased $862 billion in value from U.S. shares. The debacles, combined with falling home prices, unemployment above 9 percent 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," Goldberg said in a telephone 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."
History Not Repeating
The $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, U.S. equity funds attracted $130 billion, ICI data show.
Funds that buy domestic stocks lost $98 billion in 33 straight weeks of withdrawals last year after the 20-minute plunge in May, ICI data show. They've had redemptions $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 U.S. 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," Kinniry said.
Index Funds, Bonds
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.