For the whole of 2007, net flows into actively managed stock and bond funds will reach close to $265 billion, according to estimates by New York City consulting firm Strategic Insight. That would make it the second highest amount on record; the all-time high was set in 1993, when net flows totaled $296 billion. Overall, mutual fund assets, including those in open- and close-end funds and exchange traded funds, went up by $1.6 trillion so far this year, or about the same amount recorded for all of 2006. As for redemption activity during the period of market turbulence this past summer, Strategic Insight estimates that only two in 1000 of invested stock fund dollars were redeemed defensively in response to the sharp drop in stock prices after July 19.

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NEW YORK, NY – October 16th, 2007.

* Mutual fund assets in the US have increased by $1.6 trillion so far this year, similar to their gains in all of 2006, bringing industry assets to $12.8 trillion during October (open-end funds, closed-end funds, VA underlying mutual funds, and ETFs)

* While demand for index funds (including ETFs) has been rising, so has been the demand for actively managed funds. For all of 2007, SI projects net flows to actively managed stock and bond funds to near $265 billion, the highest amount of the past decade and second only the all-time record of $296 billion reached 14 years ago, in 1993.

* While mutual fund expansion in the US has been strong, mutual fund expansion in Asia has been even more dramatic. As reported by StrategicInsightGlobal.com, stock and bond mutual fund flows in Asia are projected to reach $450 billion, nearly matching the combined growth in the U.S. and Europe for 2007.

In the context of the worldwide mutual fund industry already reaching $27 trillion, having grown $3 trillion in each of the past two years, we share some asset retention and shareholder redemption lessons, some recent, many from a longer-term perspective.

The corrections of stock prices worldwide during the summer once again raised concerns about mutual fund investors’ redemptions. Arguably, beyond the de-leveraging of hedge funds and other managed asset pools, accelerated stock mutual fund redemptions, coupled with falling stock fund new purchases, would combine to result in large stock fund net redemptions. This would put further pressure on stock market liquidity and price levels.

“Yet, in our many studies of mutual fund redemption activity, we have observed that stock market price declines lead to redemption spikes that are always limited in scope, short-lived, and non-recurring, and fund portfolio managers always “buffer” net redemptions spikes” commented Avi Nachmany, Strategic Insight’s Director of Research.

This past summer, once again, US mutual fund investors remained committed to their long-term horizons, and market-turmoil-triggered redemptions were miniscule: SI estimates that just two in 1000 of invested stock fund dollars were redeemed defensively during the summer months in reaction to the sharp decline of stock prices after July 19th.  

Edited by: Armie Margaret Lee


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