Mutual funds: Investors withdraw $2.7 billion

Mutual funds invested in stocks lost money in May. It was the first time in five months that investors pulled out more money than they put in to stock mutual funds.

BOSTON – Investors last month withdrew $2.7 billion more than they deposited into stock mutual funds in May, snapping a four-month string of net deposits that began in January, Strategic Insight said on Monday.

Bond funds and funds buying foreign stocks attracted net deposits, as investors became less confident about the U.S. stock market, amid signs that the economic recovery is weakening, the New York-based fundindustry consultant said.

Yet investors have put a net $39 billion into U.S. stock funds during the first five months of 2011. That marks a shift in sentiment after investors began withdrawing more than they deposited each month following the stock market meltdown in 2008, while bond funds attracted net deposits. That trend held up long after stock prices began to recover in March 2009.

But May was the first down month for the Standard & Poor's 500 since August 2010. The stock index fell 1.4 percent as investors reacted to disappointing news about the economy, as well as high gas prices, tornadoes and flooding in the South, and the debt crisis in Europe.

Further setbacks in the economic recovery may lead to volatile short-term moves in and out of stock funds"as investor confidence waxes and wanes," said Avi Nachmany, research director with Strategic Insight.

Other details of how investors moved their money in May:

— Foreign stock funds: Despite the war in Libya and heightened political unrest in the Middle East, investors added a net $6.6 billion to funds that buy foreign stocks.

— Bond funds: Investors added a net $19.9 billion to taxable bond funds, a category that includes corporate bonds. That was the biggest haul since October, when net deposits totaled $21 billion. Through the first five months of the year, taxable bond funds attracted $79 billion in net deposits.

About $200 million was withdrawn in May from municipal bond funds, which buy the debt of state and local governments. Investors have been pulling out of muni bonds since early November, fearing that states and cities are in critically poor financial shape. Through the first five months of this year, the net withdrawal total is $32 billion. May's comparatively modest total suggests fewer worries about muni bond defaults, Strategic Insight said.

— Money-market funds: A net $8 billion was withdrawn from these funds, designed to be safe harbors where investors can temporarily park cash and quickly access it when needed. Their appeal has dimmed because returns have been barely above zero since early 2009.

— Exchange-traded funds: A net $6.5 billion was withdrawn from ETFs, which bundle together investments in a particular market index. Unlike mutual funds, they can be traded during daily sessions just like stocks. May's withdrawal of money from ETFs snapped an eight-month string of net deposits.