International equity mutual funds finally are emerging from a nine-month slump during which investors yanked billions of dollars.
Redemptions appear to be easing. In April, Financial Research Corp. data showed net cash flow down only $1.5 billion. Net cash flow to international funds was a negative $8 billion during the first quarter.
The nation's largest mutual fund manager, Fidelity Investments, Boston, reported the redemption rate from international funds by defined contribution plan investors had "flattened" by the end of May, but still was slightly up for retail investors.
Fidelity spokeswoman Debra McConnell said both categories of investors were pulling money from international asset class funds through March, but that outflows had calmed down and improved in April and May.
The $98 million Strong International Stock Fund, from Strong Investments in Menomonee Falls, Wis., experienced similar redemption patterns. Spokeswoman Stephanie Truog said net fund flow from all investor classes has been negative all year, but is slowing. Net flow was negative $4.4 million in February and negative $5.5 million in April, but had slowed to negative $675,000 in May. Similarly, net flow for institutional investors in the fund was negative $4 million in February, negative $46,000 in April and negative $24,000 in May.
The first quarter of 1999 was grim, with net cash flow to international/global funds down $8.4 billion, according to Boston-based FRC.Net flow to foreign and global funds was down almost $10 billion year-to-date as of April 30, and down a little more than $6 billion in both the third and fourth quarters last year.
This is in sharp contrast to the first half of 1998, when net cash flow to international/global funds was up more than $18 billion.
Poor performance of non-U.S. equity funds beginning last August rattled investor confidence.
The average performance of non-U.S. equity mutual funds for the year ended Aug. 31 was -12%, compared with 7.8% for Standard & Poor's 500 index funds, according to CDA/Wiesenberger, Rockville, Md. By Dec. 31, average non-U.S. equity fund performance for the year had improved to 6.9%, but still compared badly with the 27.4% average return of S&P 500 funds. As U.S. markets broadened by the end of April, the average 12-month performance of foreign equity funds was 4.3%, still a poor showing against the 21.1% return of S&P 500 funds.
Overall, 401(k) plan investors remained stoic. So far this year, the 1.4 million plan participants who control $66 billion in assets tracked by the Hewitt 401(k) index barely have tinkered with their monthly contributions or asset allocations to international equity funds. The index is maintained by benefit consultants Hewitt Associates LLC, Lincolnshire, Ill., and analyzes data from its record-keeping system.
In December, 5.9% of monthly transfers and plan contributions flowed out of international and emerging market funds, leaving the overall allocation to these funds at 3.4% of total assets.
By the end of April, plan investors had moved 18.2% of the total monthly transfer/cash flow into international equity funds.
They had moved 2.3% out of emerging market funds in April. The asset allocation to inter-national/emerging market options rose to 4%, according to the index.
By the end of May, participants moved 11.5% of monthly transfer/cash flow into international funds and took 0.7% out of emerging market options. The asset allocation to international/emerging market funds was down to 3.5% overall.
But even as defined contribution plan investors kept their cool and left their international asset allocations intact, trigger-happy retail investors wreaked havoc on the international stock funds used most by defined contribution plans.
Of the 25 international/global funds with the most defined contribution plan money under management (Pensions & Investments, May 3), only five funds had better net cash flow as of March 31 than the year before, according to FRC flow data. In fact, only 10 of the top 25 funds had positive cash flow at the end of March, compared with 21 funds in each of the previous two years.
The worst damage was done to the Templeton Foreign Fund. Its net cash flow plummeted to a negative $3.5 billion for the year ended March 31, from a positive flow of $1.8 billion the previous year. With $4.4 billion invested as of Dec. 31, the fund is the second most popular with 401(k) plan investors, as reported in P&I's annual survey of mutual funds used by defined contribution plans.
The Templeton Growth Fund also had severe outflows, resulting in a drop in net cash flow as of March 31 to a negative $632 million, down from a positive $2.1 billion the year before.
Investors also pulled a lot of money out of Capital Research & Management's EuroPacific Fund, the fund with the most defined contribution plan assets under management. Net yearly cash flow as of March 31 sunk to negative $653 million, down from positive $1.2 billion the year before.
The fund with the most improved cash flow compared with last year was the American Century International Growth Fund, which had net cash flow of $533 million for the year ended March 31, compared with $249 million for the same period a year earlier. The Fidelity Europe Fund gained about $110 million in net cash flow for the period, and the Putnam International Growth Fund gained about $13 million.
More of same predicted
In its preliminary report on May mutual fund flows, Lipper Inc., New York, predicted investors will keep chasing the hottest performing funds.
Lipper reported net money flow to equity funds was down about one-third from April's flow, which was bolstered by investors meeting the annual deadline for contributions to individual retirement accounts. Those post-IRA season retail investors will likely follow the trend, Lipper's report said, and push cash flow toward stronger performers from weaker performing funds.
Performance of Latin American funds, for example, was up 70% in the three months through April and attracted positive cash flow to the funds. Performance declined slightly in May and was accompanied by a slight dip in net cash flow.
