A small, economic research boutique has uncovered seemingly large discrepancies between the monthly net stock fund sales reported by the mutual fund industry and net changes in the funds' cash positions.
The gap is most glaring in December, when most fund companies pay capital gains distributions to shareholders.
In December 1995, the discrepancy amounted to a whopping $19.2 billion, according to calculations by Safian Investment Research Inc., a White Plains, N.Y., investment analysis and asset management firm.
The uncovering of the alleged discrepancy comes at a time when the ICI's monthly net sales are coming under increased scrutiny by the investing public and media. Market watchers have come to view stock fund flows as a key indicator of investor sentiment and stock market liquidity. Mutual fund industry watchers are so thirsty for this so-called monthly "Trends" report that the ICI has just begun publishing preliminary estimates for the prior month before the hard numbers are available.
(For the month of January, stock mutual funds took in a record $28.9 billion, vastly exceeding the ICI's $24.5 billion estimate for the month. The figure broke the $18.4 billion monthly record, set in January 1994.)
The cash flow into mutual funds is composed of dividends from the stocks they own, capital gains on stocks sold, and net sales of shares (including money transferred from other funds). Some of the dividend income is reinvested by shareholders, and some is not. Likewise, some of the capital gains distributions are reinvested, and some are not.
Kenneth Safian, president, took the Investment Company Institute's December 1995 net stock fund sales, including reinvested dividends of $26.8 billion. To that figure, he added $2.5 billion of exchanges into equity funds from other funds for a total of $29.3 billion. He then subtracted $8.8 billion of net purchases of stocks and other securities to arrive at a net inflow of cash into funds of $20.5 billion.
But the ICI reported an increase of only $1.3 billion, leading to an apparent discrepancy of $19.2 billion.
Why don't the numbers add up?
Capital gains distributions - unusually generous given 1995's stock market - are not included in the monthly statistics published in the ICI's "Trends" report. That doesn't mean the numbers are wrong. It's just that all of the pieces that go into the final numbers are not included.
While the hard numbers are accurate, observers will have to probe deeper if they want to get information on distributions.
"It's not that net sales are inflated. It's the cash position that's understated due to incomplete reporting in the "Trends" report," said Gavin Quill, marketing vice president of Scudder, Stevens & Clark, who tracks fund flows for his firm on a daily basis.
There are four pieces to the distributions puzzle, and ICI's report only highlights one: the proportion of dividend income distributions that is reinvested. Assuming that the reinvested income dividends figure is 60% for the industry on average, that means 40% in non-reinvested income dividends is not included in the ICI cash position numbers.
The other two pieces - capital gains distributions, whether reinvested or non-reinvested - also are omitted.
"If you were to add the information on the other three pieces, it would all fit perfectly," Mr. Quill said.
While dividend income distributions occur steadily each month at fund companies, virtually all of capital gains distributions are paid in December.
Anne Schafer, director of statistical research for the ICI in Washington, has been compiling the industry's net sales figures for 17 years. She said every year or so in December someone discovers the discrepancy. She and her colleagues then recalculate all of the figures to check their accuracy and remind themselves why the numbers appear not to add up.
She said that although the ICI asks its members for all of the distributions information each month, in practice it only has enough manpower to actively go after and compile the numbers on a quarterly basis.
"At the time we are doing "Trends" we do not have the whole picture on distributions. We know the reinvested amount and we get the rest of it in the next month or so. The amount being paid out in income dividends is not shown on the report. Capital gains money reinvested or not reinvested is not shown anywhere. So in a big period of dividends and capital gains it looks like an imbalance.
"We are reviewing the format," she said. The apparent discrepancy "only shows up in December and possibly January because sometimes (capital gains) are declared in December and paid in January."
What's more, the data collection is more complicated because people who track net sales and redemptions vs. distributions are often in different departments within a fund company, she said.
Mr. Safian said: "It's an accounting problem fund companies are not handling correctly. Something's wrong someplace." He said capital gains should be counted along with other dividends.
"I don't think it's ICI's error. It's how companies report to ICI," he said.