UPDATE 1-U.S.-based money market funds see $31.3 bln outflow -Lipper

Thu Dec 19, 2013 7:56pm EST

By Sam Forgione

NEW YORK Dec 19 (Reuters) - Investors in U.S.-based funds pulled $31.3 billion out of money market funds in the latest week to meet year-end payments on taxes and other expenses, data from Thomson Reuters' Lipper service showed on Thursday.

All of the withdrawals in the week ended Dec. 18 came from institutional money market funds, the data showed. The outflows were the biggest since mid-October, when investors pulled over $43 billion out of the funds on fears of a potential U.S. default on its debt.

Institutional investors pulled cash out of the funds in order to pay year-end tax bills and other expenses like employee compensation, said Barry Fennell, senior research analyst at Lipper.

The funds, which are low-risk vehicles that typically invest in short-term securities, are viewed as a safe place to park cash. They often invest in short-dated U.S. government securities.

Investors also pulled $933 million out of commodities and precious metals funds, which mainly invest in gold futures, marking the biggest withdrawals from the funds since July. The funds have had outflows for the past 12 weeks.

Investors withdrew cash from the funds on the conviction that the rally in U.S. stocks this year could persist without the aggressive monetary easing of the Federal Reserve, said Fennell.

The Standard & Poor's 500 stock index has rallied nearly 27 percent this year. The Fed's $85 billion in monthly bond purchases has kept interest rates low and led investors to seek higher income in stocks and other risky securities.

The confidence in the staying power of the rally has hurt demand for gold, which is viewed as a safe-haven commodity, Fennell said.

The central bank surprised investors on Wednesday by announcing a cut of $10 billion a month to its monthly bond purchases, reducing them to $75 billion a month. Uncertainty over when the Fed would begin to wind down its monthly bond purchases has troubled market sentiment for much of this year.

Stocks on Wall Street rallied more than 1 percent on the surprise Fed announcement. The S&P 500 rose 1.6 percent over the reporting period, despite concerns of a potential downturn in U.S. markets on the heels of a reduction in Fed stimulus.

Reuters had earlier reported outflows of $13.3 billion from equity funds over the weekly reporting period, including outflows of $8.5 billion from stock mutual funds. Lipper later said that the figures were incomplete.

"Apparent outflows coupled with an awkward timing between fund accounting for distributions and Lipper's Wednesday fund flows data cutoff left flows estimation incomplete for this week," said Jeff Tjornehoj, head of Americas research at Lipper.

Reuters had also earlier reported outflows of $4.2 billion from taxable bond funds. Tjornehoj said, however, that the outflows were overstated for many equity and taxable bond funds.

Fennell said that the flows for money market funds and commodities and precious metals funds were unaffected by the incomplete estimates.

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