By
CNBC
updated 10/28/2003 6:25:57 PM ET 2003-10-28T23:25:57

For the first time in nearly two months, investors pulled money out of stock mutual funds in the latest week. That has raised questions about whether investors are fleeing funds because of the recent investigation into illegal mutual fund trading.

AT LEAST ONE industry watcher believes the investigation, initiated by New York state Attorney General Eliot Spitzer and recently joined by the Securities and Exchange Commission, will be a net positive for the fund industry.

“I’m very excited that some of these issues are receiving serious scrutiny — potential late trading, market timing,” said Christine Benz, an analyst at fund tracker Morningstar. “I think what’s become clear is that the fund industry wasn’t as squeaky clean as a lot of people thought.”

But as far as investor sentiment goes, Charles Beiderman of Trimtabs.com notes that the flow of money into mutual funds typically follows the market’s performance.

“So if you look at September, it was a down month for the major indices including the S&P 500 index,” he said. “The last week of the month was especially bad, marked by a couple of steep declines.”

Taking a look at equity fund flows — as measured by a four-week moving average — fund inflows stayed steady through the early part of September, but dropped 47 percent in the last week to $2.39 billion dollars, according to AMG Data Services.

That’s a steep drop, and can be attributed to a tough week for stocks. AMG’s Robert Adler says its a stretch to assume that drop in fund inflows is solely due to the mutual fund probe.

It was on September 3rd that Spitzer said he was investigating illegal and improper mutual fund trades by hedge funds. So what about the fund families that Spitzer said allowed the hedge fund Canary Capital to make these trades?

The four named in Spitzer’s complaint were Bank of America’s Nations Funds, Bank One’s One Group of funds, Janus Funds and the Strong Funds. For those funds, inflows dried up and outlows increased for four weeks ended September 3rd to the four weeks ended October 1st.

Nation’s Funds saw fund inflows drop from $177.4 million to $12.6 million, a month over month decline of 93 percent. One Group’s inflows dropped 30 percent — from $107 million to $75 million. Outflows from Janus Equity Funds went from $443 million to a whopping $2.25 billion, a jump of over 400 percent. While Strong’s equity funds went from pulling in $75.7 million in new money to investors pulling out $113 million.

And while this looks bad, it comes at a time when all equity funds saw less new money flowing in. For the same period on a month-over-month basis, equity fund inflows fell by 69 percent.

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