Lipper: Four Scandal-Linked Fund Firms Lost $8B in September

According to Lipper’s monthly fund flow report, Bank of America’s Nations Funds, Banc One, Janus, and Strong gave back $2.4 billion in equity funds as many investors reacted to the scandal news by heading for the doors. With the four companies’ aggregate mutual-fund assets as of August 31 at slightly over 6% of the industry total, “one does see an outsized flow in relation to relative size,” Lipper said.

Lipper said redemptions by individual investors and by advisors/brokers probably accounted for the major portion of the September exodus from the four companies and predicted the pattern will continue in coming months. Researchers said some business would continue to be diverted to other fund firms or transactions would not be made at all.

New York Attorney General Eliot Spitzer named the four firms last month when he announced a $40-million settlement with Canary, a hedge fund, over late-trading and market-timing allegations (See    Spitzer Fund Abuse Probe Pumps Out More Subpoenas ). Several federal agencies including the US Securities and Exchange Commission (SEC) are also now involved in the probe and have helped to send continual ripples through the financial services industry as the investigative effort continues (See  Ripples of Canary Fund Trading Probes Continue to Spread ).

Despite the investor backlash being suffered by the four fund firms, Lipper pointed to $19.5 billion equity-fund inflows over the month as an indication that shareholders hadn’t abandoned funds in greater numbers. “We view September’s diminished but still strong flows into equity funds as an indication that investor confidence is continuing to rebuild over time, given the period and news conditions,” Lipper researchers wrote. “We have not yet seen how investors in equity funds will react in a market of significant price decline, but September brought the negative surprise of the funds-trading scandal as a new burden on investors’ minds. That unfortunate story will likely remain prominent for many months as new revelations and periodic settlements and admissions are made.”

General Industry Numbers

Moving to general industry observations, Lipper said that while September’s equity inflow was down from August’s $26 billion (See   Lipper: Equity Still Ruled the Fund Roost in August  ), September’s performance was among the best for the past 18 months.   Among domestic equity funds, which enjoyed a total $9.7-billion increase, value offerings (+$3.9 billion) handily outdid growth (+$2.2 billion).

In the size category, multi-cap domestic equity funds took the prize with a $6 billion increase while mid-cap funds walked off with a $3.1 billion hike. Small-cap funds saw a $2.2-billion inflow while large-cap was the only inhabitant of the negative column – giving back $1.6 billion.

Meanwhile, Lipper said fixed income suffered $5.7 billion in outflows – the third straight monthly loss. Short and intermediate bond funds gave back $3.3 billion while long-bonds funds lost $2.4 billion. Of the $5.7-billion total outflow, $4.1 billion was out of taxable bond offerings while the remainder came from muni funds.

Lipper said the bond flow data had all the signs of performance chasing. “The clear pattern of much smaller net outflows in bond funds ratifies our concerns from the August data: investors in bond funds really were not doing as much prudent asset allocation as we and many other analysts had hoped,” Lipper wrote. “Rather, they were merely parking money in bond funds while stocks had them scared and while bonds were performing well. The large percentage reduction in net outflows in September, when bond funds rallied a bit, shows how performance driven bond investors are.”