Investors have pulled more money from U.S. equity funds since the end of April than in the five months after the collapse of Lehman Brothers Holdings Inc., adding to the $2.1 trillion rout in American stocks.
About $75 billion was withdrawn from funds that focus on shares during the past four months, according to data compiled by Bloomberg from the Investment Company Institute, a Washington-based trade group, and EPFR Global, a research firm in Cambridge, Massachusetts. Outflows totaled $72.8 billion from October 2008 through February 2009, following Lehman’s bankruptcy, the data show.
Bears say investors are abandoning stock managers because there’s no end in sight to the decline that pushed the Standard & Poor’s 500 Index within 2.1 percentage points of a bear market in August. Bulls say the retreat by individuals has been a reason to buy since the bull market began in March 2009 and withdrawals mean money is available to buy stocks in the future.
“When we’re getting close to a market bottom, the phone starts ringing off the hook and our clients want us to sell everything,” Bruce McCain, who helps manage $22 billion as chief investment strategist at the private-banking unit of KeyCorp, said in a phone interview on Sept. 14. “Market bottoms are less about an improvement in the fundamental situation, whether the economy or outlook for earnings, and a lot more about getting rid of all the anxious investors.”
About $177.7 billion has been removed during the past 30 months from mutual and exchange-traded funds that invest in U.S. shares as the benchmark gauge for American equity rallied as much as 102 percent, before falling 17.9 percent through Aug. 8. Investors pumped in $18.7 billion during the first four months of 2011, before removing about four times that amount since, according to the average of data from EPFR and ICI, the money managers’ trade group. The August estimate doesn’t include ETF data from ICI.
Bond funds added $42.3 billion from the end of April through July and started posting weekly outflows last month, according to ICI. Since the bull market began, fixed-income managers have received a net $666.4 billion.
Exceeded $40 Billion
The last time equity fund outflows exceeded $40 billion during a four-month period was in August 2010, the data show. The S&P 500, which completed a 16 percent decline the previous month, went on to gain 13 percent through November. Monthly outflows in the last two years exceeded $10 billion seven different times. The S&P 500 advanced the next month in five of those cases, according to Bloomberg data. S&P 500 futures dropped 1.6 percent to 1,192 at 8:34 a.m. in London today.
AllianceBernstein Holding LP’s assets under management slipped 5 percent to $433 billion in August, “with retail in particular affected by the month’s volatile capital markets,” the New York-based company said in a Sept. 13 statement. Invesco Ltd.’s equity assets fell 7.8 percent to $276.4 billion from July, reflecting the “effects of negative market returns.”
Withdrawals accelerated in September and October 2008 as Lehman’s bankruptcy, the biggest in U.S. history, dragged down shares and spurred the worst financial crisis since the Great Depression. The S&P 500 dropped 30 percent in two months.
Investors never got over that shock, said Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama.
Banking Crisis Concern
Now, concern Greece will default and spur a banking crisis has driven the S&P 500 down 11 percent since April, leaving it trading at 13.3 times reported earnings, 20 percent less than the last trading session before Lehman fell.
“It’s the once burnt, twice shy phenomenon,” Hellwig said in a telephone interview on Sept. 12. “Investors are much less risk tolerant than they have been in the past. You would think that someone would say, ‘I can take a little bit of risk, look at the P/E,’ but they just want to stay on the sidelines.”
The benchmark gauge for U.S. equities advanced 5.4 percent to 1,216.01 last week, the third-biggest rally since 2009, after central bankers said they would provide dollar loans for European lenders and French President Nicolas Sarkozy and German Chancellor Angela Merkel said they’re convinced Greece will remain in the euro area. The index has lost 3.3 percent in 2011 and is now up 80 percent from its March 2009 low.
Bears say the withdrawals foreshadow more declines. Stocks have fallen four straight months, losing 5.7 percent in August after economists lowered forecasts for global economic growth, manufacturing in the Philadelphia region contracted by the most in more than two years and a debate in Congress over the budget deficit prompted S&P to strip the U.S. of its AAA credit rating.
“The average investor is less financially and psychologically prepared for this increased volatility,” Jason Brady, a managing director at Thornburg Investment Management Inc, who helps oversee about $76 billion from Santa Fe, New Mexico, said in a Sept. 15 telephone interview. “They’re staying out and there’s something of a secular move to a demand for income and safety.”
Chances the global economy enters a recession have risen to 1-in-2, Nobel-prize winning economist Paul Krugman said Sept. 8. JPMorgan Chase & Co. sees the chance of the second recession since 2007 at 40 percent, according to a Sept. 7 note.
Bigger stock swings are leading individuals to sell shares, Brady said. The VIX, the benchmark measure of U.S. equity derivatives, surged 50 percent to 48 on Aug. 8 for the biggest increase since February 2007 after S&P lowered its rating on U.S. long-term debt to AA+. The VIX has averaged 20.43 over its 21-year history.
“The individual investor is very frustrated and at their wits’ end with the equity market, and it’s hard to blame them,” Walter Todd, who helps manage $940 million at Greenwood Capital in Greenwood, South Carolina, said in a Sept. 16 telephone interview. “It’s certainly not going to help push the market higher if you’ve got that constant drain.”
While BNY Mellon Wealth Management’s Leo Grohowski says he understands the aversion to equity price swings, valuations are too low to justify more selling. Of the 500 companies in the benchmark equity index, 331 had price-earnings ratios at the end of August lower than they were when the year began, data compiled by Bloomberg show.
‘Lack of Confidence’
“There is this lack of confidence in equities as an asset class just due to the volatility,” Grohowski, the chief investment officer for BNY Mellon, which oversees $171 billion, said in a telephone interview on Sept. 15. “But for investors who are long term and intermediate term, the market is undervalued. Now would not be a wise time to be reducing equity exposure because there’s an awful lot of bad news or expectations already priced in to the market.”
Outflows following September 2008 lasted through March 2009. During the last three months of 2008, companies were reporting their fourth quarter of shrinking earnings and the U.S. jobless rate was halfway through its climb to the highest level since 1983. Gross domestic product slid 5.1 percent from the fourth quarter of 2007 to the second quarter of 2009, the most of any recession since the 1930s, according to Commerce Department data.
Now, investors are withdrawing funds after companies beat profit estimates for 10 straight quarters. The world’s largest economy posted two years of growth and economists are calling for GDP to expand 1.6 percent in 2011 and 2.2 percent in 2012, according to the median estimates compiled by Bloomberg.
Corporations have been hoarding cash and paying down borrowings. The S&P 500’s net debt to earnings before interest, tax, depreciation and amortization ratio is down to 2.5 from 5 in the second quarter of 2008, data compiled by Bloomberg show. This year’s earnings will increase 18 percent to a record $99.57 a share and break $100 next year, according to the data.
DirecTV in El Segundo, California, is trading at 14.4 times reported earnings, a valuation 14 percent below the level at the end of 2008. Since the third quarter of 2009, profits at the largest U.S. satellite-television provider increased an average 64 percent each quarter. They’re forecast to rise 26 percent next year, according to analyst estimates compiled by Bloomberg.
Earnings at Dow Chemical Co. retreated during the financial crisis. While profits more than doubled in every quarter of 2010, the shares are down 17 percent this year. The largest U.S. chemical maker fired workers, shut plants and sold assets to bolster earnings. Since 2009, the Midland, Michigan-based company has posted better-than-estimated sales in all but one period.
When fund flows show investors bailing out of stocks at the rate they are now, it’s usually bullish, Brian Barish, the Denver-based president of Cambiar Investors LLC, which oversees about $8 billion, wrote in a Sept. 15 e-mail.
“The five months after Lehman were an epic buying opportunity, yet investors liquidated en masse,” Barish said. “Retail unfortunately tends to time things poorly. I don’t expect the current situation to be all that different.”
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