Mutual fund cash floods Wall St

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The Independent Online
The remarkable run of the bull on Wall Street is prompting private investors in the US to pour cash into equity mutual funds at record-breaking rates, according to the latest statistics released by the industry.

After a slowdown in the cash torrent in October, the pace has picked up strongly again in November.

Moreover, for the first time in history, inflows into US mutual funds, the equivalent of unit trusts in Britain, are set to exceed $200bn (pounds 119bn) for the calendar year.

The boom is creating a sense of vertigo among some on Wall Street who worry about the exposure of the funds - and their investors - in the event that the bull should suddenly become a bear. It is also increasing pressure on individual funds to outperform one another and attract customers.

So far, there is scant sign of any significant cooling in the market.

Even though the Dow Jones Industrial Average subsided marginally in the two days before yesterday's start of the Thanksgiving holiday in the US, its rise in recent weeks has been relentless. So far this month, it is up by more than 8 per cent and by 27 per cent to 6,499.24 points since the start of the year.

The climbing markets and the cascade of cash into mutual funds are linked of course. As mutual fund managers hunt for issues in which to invest their bulging supplies of cash, so they themselves are feeding the market's skyward frenzy.

One indicator of the hunger for equities is the rapidly declining cash component of most managers' portfolios. According to the new figures, released by the Investment Company Institute, only 6.2 per cent of mutual fund holdings are now being held in cash.

That in itself is tweaking anxieties about the consequences of a sudden market reversal. Cash reserves among the mutual funds have not fallen so low since June 1977. The funds normally prefer to retain a reasonable cash cushion in case of a market downturn and the possible stampede of withdrawals by investors that could follow.

In its report, the Investment Company Institute, which is a Washington- based mutual fund trade group, confirmed that inflows into mutual funds in October reached $13.4bn, a 25 per cent decline on September when cash flows measured $17.3 bn. It reported a strong recovery in the flows during this month, however. Simultaneously, though, bond funds continued to suffer net outflows of cash.

The strong November performance for mutual funds, which is likely to produce a final tally for the month of $20bn, is a reflection of the renewed confidence felt by investors in the wake of the US elections, which confirmed the political status quo, with Bill Clinton returned to the White House but the Republican Party given continuing control of the US Congress.

Among the high-profile mutual fund companies, Fidelity Investments confirmed that the net inflows into its funds this month are poised to exceed $1bn. Smith Barney is also reporting a market increase in new cash for its funds this month compared with October.

By the end of October, the US mutual fund industry was managing no less than pounds 1,390bn in investors' money, more than double the amount they were holding only two years ago.

Among those urging caution was Jessica Bibliowicz, a vice- president at Smith Barney. "There hasn't been a market yet where investors haven't been disappointed by chasing performance," she told the New York Times.

"Investors who are looking at this year and last year and saying `I want my 50 per cent too' are the ones that worry me a great deal."

So extensive has been the gain in the market, however, that even if there was crash of 508 points in one day - the amount by which the Dow tumbled on Black Monday in October 1987 - those who made their mutual fund investments before 1 November would still come out ahead.