Will this week's chaos cause mutual fund investors to redeem shares? No one yet knows the long term impact. The good news is that the impact in the first week after the event has been muted with fund firms reporting lower call volume than usual while the market was closed and no extraordinary levels of activity yesterday. Those looking for a longer term prognosis may want to examine data compiled by Strategic Insight.

The New York City-based researcher has looked at redemptions patterns over the past 60 years. It found that the historic periods of shareholders pulling money from funds in order to preserve capital have been "short-lived, non-recurring, and limited in magnitude." It also found that crisis and uncertainty have been more likely to lower activity than increase it.

"During times of financial uncertainty, investors reduce (not increase!) the turnover of their financial assets; thus redemption activity tend to decline during a bear market, with the exception of brief and modest spikes during sharp down-market weeks," says the research.

Looking at recent history, the paper argues that despite a number of events in recent history and the onslaught of new products, only a minority shareholders have account for most redemption activity. It adds that that activity has also remained nearly constant at about three percent of assets in a wide variety of circumstances.

The biggest impact, historically, has been a decrease in new purchases of fund shares. Strategic Insight's analysts believe that "steady retirement investing, dollar-cost-averaging deposits and opportunistic buying will prevent equity fund net redemptions from remaining sustained and large."

Still, the industry may not be able to count on defined contribution plans, the principal source of retirement money for funds, to drive future growth even if the plans do provide a solid asset base. 401(k) plan asset growth has itself been driven more by asset appreciation in the past few years, and far less by net new contributions. The catch is that the proportion of assets in these plans has fallen as the size of the 401(k) system has ballooned. Indeed, the key players in the defined contribution market now see rollovers to IRAs as an important channel as new contributions to keep up their own growth.

Looking further back in history, the research found that equity fund redemptions as a percentage of assets fell in each bear market, including the bear market of early Seventies. Even the dollar value of equity fund redemptions fell to $2.7 billion in 1974, almost half levels in 1972, according to Strategic Insight.  

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