Investors Turn Conservative as Market Stays Hot

Mutual fund investing continues to set records, but investors have turned cautious.

Safety is now the name of the game for American mutual fund investors.

Millions of dollars continue to pour into US funds daily. But investors, wary of a market downturn, shy away from most high-risk stock funds.

Instead, the money marches right to safety, in good old-fashioned growth and income funds, says John Rekenthaler, publisher of mutual fund information at Morningstar Inc., Chicago.

"The growth and income funds are doing just fine," he says. For the year through February, growth and income funds are up 5.25 percent; growth funds are up 2.94 percent.

A growth fund is basically conservative, investing in stocks of large companies, such as IBM or General Electric, with the potential for steady growth.

A growth & income fund follows a similar pattern, but includes a focus on stocks that pay dividends, hence the term "income."

Those gains trail the Standard & Poor's 500 index, a broad measure of US markets, ahead 10.2 percent this year, through Monday, March 10.

But Mr. Rekenthaler notes that most equity (stock) funds lag the market.

The draw to growth, he says, stems from the stellar performance of blue-chip stocks in general.

This particular market environment remains, as it has for the past few years, a "blue-chip driven market." Growth and income funds tend to scoop up blue-chip stocks.

Aggressive losers

Losers, in terms of performance, include aggressive growth funds (those that invest in riskier, high-growth companies). The group is down almost 1 percent through February, according to Morningstar.

Take what happened on Monday says Rekenthaler. The market was up, with the S&P 500 ahead about 1 percent.

But a number of aggressive growth funds tumbled that day, several of them off 2 or 3 percent, he says.

Market laggards include small cap funds and some smaller company technology funds.

(Small cap funds buy stocks of small companies, with the potential for high returns. They're also riskier than growth companies, part of an aggressive investment strategy.)

Small cap funds are down 1.35 percent through February. Funds oriented to larger high tech companies - Microsoft for example - are holding their own.

Will investors continue to favor mutual funds? Assuming the economy maintains a moderate pace, there is little to suggest otherwise, experts say.

"Inflows are very strong for us," says Brian Mattes, a spokesman for the Vanguard family of funds, in Malvern, Pa. "We're pulling in about $200 million a day, which has been consistent since the beginning of the year," he says.

Money keeps flowing

Net inflows for Vanguard hit $4.9 billion in January, falling slightly to around $4.1 billion in February (which has two fewer calender days), and is holding steady in March, he says.

The big gainer for Vanguard continues to be the flagship Vanguard S&P 500 index fund, Mr. Mattes says.

Its goal is to parallel the performance of the S&P 500 stock market index, and it roped in $1 billion of new investor money for both January and February.

Another fund group, T. Rowe Price in Baltimore, reports similar investor interest.

Strong money

"Inflows are looking strong," says T. Rowe Price spokeswoman Rowena Itchon.

Preliminary net-flow statistics for the entire industry for February are expected to be announced by this weekend, according to the Investment Company Institute, a trade group.

While the group expects a slight decrease from January, results are expected "to be solid," says a spokesman.

January's inflow set a record. Investors poured $29.4 billion into stock mutual funds and $2.94 billion into bond funds.

February's numbers look less robust.

"We're seeing inflows of at least $12.8 billion into equity funds in February," says Carl Wittnebert, managing editor of Mutual Fund Trim Tabs, a financial report published twice a week.

What is clear, Wittnebert says, is that "investors are very cautious. There is a definite tilt to the conservative side," he says.

Still, some hot-shot overseas funds, particularly emerging market funds, have roared to the head of the class so far this year.

Experts stress that while overseas funds - especially emerging market funds - often ring up spectacular gains in terms of return, they remain highly risky.

One Bear's Bullish Approach

Mutual fund manager Jimmy Barrow doesn't find much to worry about these days.

Every now and then, he says, "there's one, maybe two stocks," that furrow his brow and which he knows he ought to spin out of his portfolio.

What's important, he says, is keeping his fund up-to-date with companies likely to make money over time.

Mr. Barrow is the lead-manager for the American AAdvantage Growth & Income Fund, based in Dallas.

The fund, part of the American AAdvantage family of funds, has $1.3 billion in assets and last year showed a total return of 21.1 percent.

So far this year, through February, it has returned about 4.3 percent, lagging the S&P 500 index, which is up around 8 percent.

But investors favor such funds - growth and income - regardless of the broader market performance.

Barrow's fund, for example, buys the stocks of about 170 companies. Turnover, he says, is low. He replaces only 25 to 30 percent of the fund's stocks annually.

And even though new money is coming into the fund, he doesn't feel a need to rush out to buy on a daily basis. "I look for value - for good companies that are priced at some discount to the market." His fund is virtually fully invested.

Many of Barrow's companies might be considered defensive plays.

He has quietly added a few utilities and oil stocks. He likes Chase Manhattan Bank. But he says he's not about to shift his portfolio dramatically because of talk about a possible market downturn.

"I was born a bear," he laughs. "I've always been cautious." Could there be a downturn? Sure, he says. But the best strategy, he believes, is to look for value and quality - and stay invested.