Caution costly as markets log gains

Funds growing, investors fewer

Tuesday, December 25, 2012

— Americans have missed out on almost $200 billion of stock gains as they drained money from the market over the past four years out of worries over the financial crisis.

Assets in equity mutual, exchange-traded and closed end funds increased about 85 percent to $5.6 trillion since the bull market began in March 2009, trailing the Standard & Poor’s 500 Index’s 94 percent advance, according to data compiled by Bloomberg and Morningstar Inc. At the same time, the proportion of retirement funds in stocks fell about 0.5 of a percentage point, compared with an average rise of 8.2 percentage points in rallies since 1990.

The retreat shows that even the biggest gain since 1998 failed to heal investor confidence after the financial collapse that wiped out $11 trillion in U.S. equity value was followed by record price swings in equities, a market breakdown that briefly erased $862 billion in share value and the slowest recovery from a recession since World War II.

Individuals now are withdrawing money as political leaders struggle to avert budget cuts that threaten to throw the economy into a new slump.

“Our biggest liability in the stock market has been the total destruction to confidence,” James Paulsen, the chief investment strategist at Minneapolis-based Wells Capital Management, which oversees about $325 billion, said. “There’s just so much evidence of this recovery broadening.”

The S&P 500 climbed 1.2 percent to 1,430.15 last week, extending the 2012 gain to 14 percent, led by financial stocks and consumer companies. The benchmark index from American equity has risen from a low of 676.53 on March 9, 2009, though it is still 8.8 percent below its record high on Oct.9, 2007. The gauge dropped 0.2 percent to 1,426.66 in New York on Monday.

Now, much of the damage to investors is self-inflicted as U.S. growth improves and companies whose earnings aremost tied to economic expansion reap the biggest rewards. Of the 500 companies in the benchmark index, 481 are higher now than they were in March 2009 or when they entered the gauge.

Individuals are selling, cutting the proportion of assets in stocks to 72 percent from 72.5 percent in 2009, according to 401(k) and IRA mutual fund data from the Washington based Investment Company Institute compiled by Bloomberg. Investors are lowering the proportion of stocks they own in retirement funds during a bull market for the first time in 20 years.

The percentage of households owning stock mutual funds has also fallen, dropping to 46.4 percent in 2011, the second-lowest since 1997, according to the latest ICI annual mutual fund survey.

Money has gone to the relative safety of fixed-income investments.

Managers who specialize in corporate bonds and Treasuries have received nearly $1 trillion in fresh cash since March 2009, ICI data show. Federal Reserve Chairman Ben S. Bernanke’s zero percent interest-rate policy and the lowest inflation in almost 50 years have helped spur a 29 percent rally in debt securities since Obama’s first term began, according to the Bank of America Merrill Lynch’s U.S. Corporate and Government Index through the third quarter.

Outflows from stocks muted gains as reduced demand kept companies from going public or expanding through mergers and acquisitions, according to Paul Zemsky, head of asset allocation for ING Investment Management, which oversees $170 billion.

“Imagine where we could be if we had had positive inflows,” New York-based Zemsky said. “It would be very helpful to get those flows reversed and have that money come out of bonds and into stock funds.”

Companies holding a record $1.03 trillion of cash on their balance sheets are failing to lure individuals to investment funds even though valuations have been stuck below the average since 1954 for thelongest stretch since Richard Nixon was president and bond yields have fallen to near record lows. The S&P 500 trades at 14.5 times reported earnings, a 12 percent discount to the six-decade average.

“What investment options do they have? Not many,” James Butterfill, who helps oversee $64 billion as headof global equity strategy at Coutts & Co. in London, said. “Corporates are still very attractive, they are the most underleveraged since the early 1990s.”

Even investors who were rewarded by sticking with stocks have had to endure record daily price swings and three so-called corrections of at least 9.9 percent. In August 2011, after S&P stripped the United States of its AAA credit rating, the Dow Jones Industrial Average alternated between losses and gains of 400 points or more on four consecutive days, the longest streak on record, data compiled by Bloomberg show.

Daily swings in the S&P 500 averaged 1.24 percent in 2011, data compiled by Bloomberg show. So far this year, volatility is down to an average daily move of 0.59 percent.

“We’ve had all of this crazy risk-on/risk-off day-to-day fluctuation based on headline stories,” John Carey, who helps oversee about $200 billion at Pioneer Investments in Boston, said. “There’s been attractive income for stocks but certainly at the price of some volatility.” Information for this report was provided by Alexis Xydias and Lee Spears of Bloomberg News.

Business, Pages 25 on 12/25/2012