The old saying is what doesn't kill you just makes you stronger. By that measure the fund industry should be looking a little like Arnold Schwarzenegger right now as the industry has suffered through a two-year collapse in sales of stock funds. But the wait for the rebound may finally be over.

While total flows into all types of mutual funds in March remained flat, that calm masked a shift from low- and no-margin money funds into high-margin equity funds that will likely boost the industry's profitability. Net flows into equity funds hit levels not seen since early 2000, according to industry watchers.

Rueters' Lipper service estimates that March flows to stock funds hit $29.6 billion, the highest level since $25 billion flowed into funds in January 2001. Even more optismistic is Strategic Insight's estimate that flows reached $37 billion. The last time the industry saw numbers like Strategic Insight's estimates was in March of 2000.

The numbers from Lipper also reveal another telling shift. Outflows from money market funds, the safe harbor where many investors rode out the storm, grew to $38 billion, their largest level since April of 2000. Lipper added, though, that ninety percent of those funds were drawn by institutional investors seeking to meet corporate financing needs and that they were not reinvested in stock funds.

Altogether, Lipper's data show that the industry saw a small outflow when all asset classes are considered. Equity funds pulled an estimated $29.6 billion, bond funds grabbed $5.4 billion and money funds lost $38.1 billion. Add those numbers up and outflows exceed inflows by $3.1 billion.

Meanwhile, Strategic Insight reports that flows to equity funds likely exceeded $70 billion during the first quarter of 2002. That is the largest quarterly pace since the second quarter of 2000 following the bursting of "new economy" valuation bubbles, says Avi Nachmany, director of research at the New York City-based firm.

Both firms point to rising investor confidence as a primary reason for the revived flows. Nachmany also points to a shift by investors from investing in individual stocks to diversified funds.

Still, fund executives themselves are not yet fully-embracing a recovery, says Nachmany.

"You don't see a lot of marketing or aggressive advertising by fund firms," he said. He also noted that the new optimism seen in investors is not yet apparent in fund companies. "There is is a sense that 'our business is higher,'" said Nachmany, "but there is a sense of suspended disbelief about whether it will continue."

Fund executives have been focused on day-to-day, core business rather than on growth, said Nachmany. In many cases, that meant determining the three things that were essential and ignoring all other matters.

"Everything not essential to that execution was put aside," he said. "By and large they are still in that mindset but think they can get out of it soon."  

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