Barring an eye-opening reversal of funds flows in the next four days, 2002 will go down as the first year equity mutual funds suffered net outflows since 1988, according to Lipper Analytics. Yet, even as equity fund sales were sucking wind, bond funds raked in the cash.

Bond fund flows are on pace to break the record of $120 billion net inflows by ten percent, reports Lipper. That record is even older than the equity fund record. It was set in 1986.

Lipper also predicts, though, that bond funds will not repeat their record performances in 2003, even if stock prices continue to sail in the doldrums. It also points out that the fund industry may be facing a new risk if interest rates rise and bond fund investors face losses.

"Should yields rise soon or considerably, the funds business would have clients mindful of their injuries in equity funds, followed by new reversals in their recently acquired bond funds, and unimpressed with money-fund yields," writes Lipper in its monthly report.

"Ironically, the best of all 2003 likely worlds for the fund business may be a slow economic rebound and a flat bond market plus a modest rise in stock prices," said Lipper's Don Cassidy. "A stronger stock market might do little to help inflows immediately, but could well mean a decline in bonds and losses in bond funds - not a desirable outcome," he added. "While the year ahead seems likely to be more sanguine than the two just ended, we will continue to live in 'interesting times'."

November Trends

While 2002 will surely be disappointing, there is some evidence that the year ended on an up note. November marked the first month since May in which flows to equity funds increased, according to Lipper. The net flow to equity funds reached about $10 billion with $7 billion of that amount coming from retail-investor share classes and $3 billion from institutional classes.

Still, Lipper remains less than upbeat about the November flows. The researcher points out that the stock market rose about 21 percent during November as measured by the S&P 500. When placed in that context the flows are less impressive.

Meanwhile, fixed income flows were a positive $7 billion in November. That is down from the levels reached less summer but higher than in October. It is also an impressive amount considering the rally in the stock market. The most popular funds are those with short- and intermediate-maturities. 

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