Americans’ long-term love for stocks started wearing thin in 2001, when the net flow to equity funds from retirement accounts declined sharply. In the meantime net flow to hybrid, bond and money funds increased, reversing the 2000 trend, according to new data from the Investment Company Institute (ICI), the mutual-fund industry’s largest trade group in the US.
It is true that in the first five months of 2002 American private investors added a total of $72bn to their stock funds, almost twice the new money that went into equity funds in the same period last year, according to a survey of ICI members. But in June and July investors’ patience with Wall Street looked again under strain: Fidelity and Vanguard group, the two biggest American investment companies, said their customers were taking more money out of their stock funds than they were putting in. If this trends goes on, it will add more problems to the already troubled US stock market.
Mutual funds retained a 21% share of the US retirement market at year-end 2001, with $2.3trn (E2,332trn) in assets held in retirement accounts out of a total of $10.9trn. The latter includes Individual Retirement Accounts (IRAs), annuities, employer-sponsored defined benefit (DB) and defined contribution (DC) pension plans. Total assets in the U.S retirement market were down 4% in 2001 from $11.4trn in 2000; mutual funds’ share declined similarly, mostly because of the decrease in equity funds’ value, not because of a negative net flow.
In fact 2001 net flow into mutual funds from retirement accounts was the third largest on record: an estimated $140m, after $158m in 1998 and $150m in 1999. Retirement account net flow amounted to about one-quarter of total mutual fund industry net new cash flows last year. In particular, net flows were much better than in 2000 for hybrid, bond and money market funds.
Generally speaking, the only type of retirement plans that did not decline in 2001 were annuities, with $1,180 billion in assets (up from $1,150bn in 2000), which represent 11% of the US retirement market. That is a clear sign of investors’ eagerness for ‘safe’ returns. Defined benefit plans – still held the largest share of the market: 45 % or $4.9trn in assets, down from $5trn in 2000. DC plans held $2.5trn (23%), down from $2.6trn in 2000; and IRAs held $2.4trn (22%) down 4% from $2.5trn in 2000.
ICI data focused on which share of total IRA assets were held by different institutions in 2001. Mutual fund IRA assets fell 5% to $1,173bn (from $1,237 in 2000), but kept 49% of total IRA assets or the same share as in 2000 and slightly less than in 1999, when mutual funds reached their historical record: 50% of the market or $1,264bn. For the first time since 1990, bank and thrift deposits increased their share of the retirement market from 10% in 2000 to 11% last year or $255bn in assets. Unchanged was the 8% share of life insurance companies ($200bn), while securities held in brokerage accounts declined from $816bn to $779bn or from 33% share to 32%.
“The decline in mutual fund IRA assets occurred solely in the category of equity funds, as IRA assets in hybrid, bond and money market fund categories all posted appreciable gains on 2001,” stress ICI researchers. Not only the value of stocks held in equity funds’ portfolios decreased due to the market downturn, but also the net flow to equity funds from IRAs in 2001, though still positive, was only about one-third of that in 2000. On the contrary, net flows to hybrid and bond funds were negative in 2000 – respectively -$5bn and -$9bn – and turned positive last year: +$7 and +$16bn. Similar trends were true for defined contribution plans like 401(k) plans. Mutual fund DC plan assets are still 68% invested in domestic equity products, down only 5 percentage points from the record of 73% in 1999.
The awareness of having reached maybe a ceiling in DC plan business’s growth, has induced some investment companies to look for alternatives and diversify more and more away from their core financial activities. For example, Fidelity – number one in the 401(k) plans and IRA’s market – tries to rely less on stock-market-related revenues and has just signed a major contract administering human-resources programmes for International Business Machines (IBM). It will not only take care of pension administration, but also health-plan administration and career services for IBM employees. This way Fidelity hopes to take advantage of the billions it has invested in computer technology and software, which are useful both for retirement and other personnel administration.

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