Trend shows cash being sucked out of equities

Retail investors in large swaths of continental Europe are selling equity funds even as a strong stock market rally has taken prices back to the levels last seen in 2001, according to data from Feri Fund Market Information.

The wave of selling flies in the face of historical precedent, with strong equity rallies usually the cue for private investors to start throwing money at the market.

Instead, it appears that small investors who bought near to the top of the 2000 bubble and have sat on paper losses ever since are taking the opportunity to get out now that their investments are reaching break-even.

Recent weeks have seen the pan-European FTSE Eurofirst 300, London's FTSE 100, Germany's Xetra Dax, France's CAC 40 and Italy's Mibtel 30 all return to levels last seen in 2000 or 2001, while on Wall Street the Dow Jones Industrial Average has hit a series of record highs.

The lack of interest from retail investors will come as a disappointment to fund management groups that would have been expecting strong inflows as equity markets rebounded strongly from a sharp correction in May and June, with the Eurotop up 18.7 per cent from its June lows, particularly as retail equity funds are among the highest margin investment products.

The trend has been most noticeable in Italy, where equity funds saw net outflows of €21 billion in the third quarter, and Germany, where a total of €9 billion was withdrawn.

Early data for October also show Italians redeeming a further €4 billion and Spain reporting a net outflow from equity funds.

"People have sat on equity holdings since the top of the 1999 bubble, waiting for stock markets to come back and bring them back to par," said Diana Mackay, managing director of Feri FMI. "Now longstanding investors who came into the market at the peak of the bubble are actively redeeming their funds. People are beginning to come out because stock market values are back to, or close to, where they were at that time."

Ms Mackay linked the high levels of redemptions in Germany and Italy to the fact that a relatively large number of novice equity investors in both countries were drawn into the market during the dotcom boom.

"In both markets there was a huge sale of equities to rather unsophisticated investors at the top of the market."

In contrast, she said, the UK had a more sophisticated equity culture, while, conversely, the relative lack of an equity culture in France led to less money being poured into funds anyway.

Some of the cash being sucked out of equities is being recycled into money market funds, Feri believes, while much of the rest is being withdrawn from mutual funds full stop.

Italy reported net redemptions of €9.6 billion across all fund categories in the third quarter, Germany saw outflows of €1.6 billion, while in Spain some €700 million was withdrawn.

In contrast, mutual funds sourcing the bulk of their assets from French and British investors saw net inflows of €8.7 billion and €5.6 billion respectively.

Bernard Delbecque, head of economics and research at the European Fund and Asset Management Association, put a more positive spin on any net outflows.

"Investors are becoming more sophisticated and understand the importance of diversification," he said.