There was a fascinating and somewhat scary article in yesterday's New York Times by veteran mutual fund watcher Mark Hulbert, pointing out that even in the bull market of the past few months, inflows into mutual funds have been barely more than a trickle. From the market's bottom on March 9 to the yearly high last month, equity funds took in only $7.8 billion in new money. By contrast, over the five years of bull market from 2002 to 2007, those same funds took in $250 billion.
Hulbert attributes this loss of money to investors who are wary of the stability of this market, and while I respect his credentials as a fund expert, I think he's missing an important point here. Unemployment is over 10 percent, and many of those who still have jobs have seen their employers slash or eliminate 401(k) funding. For most people the primary way they invest in mutual funds is through their 401(k).
If not the biggest reason for the dropoff in mutual fund purchases, that is at least a significant reason. And like so many other things in this screwy economy, it's a vicious circle. Companies won't beef up their employer match again until unemployment goes down and they have to compete for talent again. So we won't return to a free flow of money into the markets until the economy improves - which means we better hope the improvement of the economy isn't dependent on those mutual funds getting hundreds of billions of dollars again.
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