Equity mutual funds continued to post steady asset growth in December, but bond and hybrid funds were hit hard by redemptions, a strong signal of investors' increasing impatience with performance in these categories.
Net sales of equity funds - meaning sales minus redemptions - amounted to $24 billion in December, according to the Investment Company Institute in Washington. That was up from $19 billion in November. Net sales of equity funds for the year totaled $186 billion, compared with $157 billion in 1998.
By contrast, bond mutual funds lost more than $13 billion of assets in December, and hybrid funds - which invest in both stocks and bonds - lost more than $4 billion. For 1999, bond funds lost $5 billion, and hybrid funds showed a net decrease of $12 billion.
In 1998 bond funds had net new cash flow of $75 billion, and hybrid funds gained $10 billion.
To be sure, the exodus from bond funds occurred amid fears of rising interest rates. But investors have also come to expect higher returns than bond or hybrid portfolios typically deliver, industry insiders said.
"People's expectations are completely out of whack as far as what they expect the market to do," said David Haywood, an analyst at Financial Research Corp., a consulting firm in Boston.
"Redemptions are a problem" in bond funds, said John Calvano, president of Birmingham, Ala.-based Amsouth Bancorp's proprietary fund family.
Even Amsouth's hybrid Equity Income Fund - which Lipper Inc. ranked second in performance in its class in 1999 - had more redemptions than sales last year, Mr. Calvano said.
Though the banking company emphasizes a diversified portfolio that includes bond funds, equity funds had stronger sales than bond or hybrid funds, he said.
Nor does he see the trend reversing. Today's "more educated" investors will hold on to an equity fund in a bad year, he said, but investors have less patience with the lower potential upside of bond and hybrid funds.
"People are looking for higher returns today," Mr. Calvano said. "They don't consider 7% to 9% a good return."
James E. Ely, managing director of the wealth management sales group at Los Angeles-based Sanwa Bank California, said he also saw a lot of redemptions in California tax-free bond funds, which Sanwa had been touting to its clients.
"It's a pure return issue," he said. "People are thinking they should get 20% or above."
But market volatility, Mr. Ely said, will eventually put bond funds back in vogue.
"Fluctuations are going to cause fear to set in, especially among our older customers," he said. And when that happens, he added, Sanwa's brokers would still be promoting bond funds.