Worst outflows since 2002 at U.S. stock mutual funds

Investors have been pulling out of U.S. stock mutual funds, especially recently.

Net outflows so far this year are 20 percent above their all-time annual record. Amid the housing-market slump, credit-market deterioration and lagging consumer confidence, outflows rose to a net $9.5 billion for November alone, bringing year-to-date outflows to $30 billion, according to projections from The Leuthold Group, based on data from the Investment Company Institute.

This is above the previous record outflow of $25 billion for all of 2002, the tail-end of a vicious bear market. Since May, investors have redeemed a net $52 billion from U.S. stock funds.

Leuthold Group senior analyst Eric Bjorgen says the outflows began long before the mortgage meltdown roiled stocks in late summer. In fact, investors have been pulling out of U.S. stock funds since the first quarter of 2004, after a brief surge in 2003 as the market rebounded from the tech-stock collapse.

"The fact is that the public is remembering the last bear market and making their investment decisions based on a painful memory," Bjorgen says. He warns outflows can become a "self-fulfilling prophesy." As fund managers sell stocks to raise cash to meet redemptions, they put further pressure on share prices.

As retail investors have soured on U.S. stocks, they have shifted to money-market funds, the year's most popular asset category.

"I think that really signifies that the public is becoming very conservative with their outlook toward the capital markets in general," Bjorgen says.

A boom in net inflows to foreign equity funds may also be slowing. After recording $15 billion in net inflows in October, Leuthold Group analysts predict an outflow of $5.2 billion in November.

"I think when the foreign markets begin to correct, the public is going to have another lesson they have to learn," Bjorgen says.