Fund Investors: Once Burned, Still Shy
06/29/2011 10:30 am EST
Gauging by the May fund-flow numbers, investors are still a little gun shy about equities and growth, observes Kevin McDevitt of Morningstar FundInvestor.
Estimated long-term May fund flows were a healthy $22.6 billion, but this still marked the fourth-consecutive decline from January's $30 billion high-water mark.
US-stock funds suffered their first significant outflows of the year, $4.5 billion, as a slow-moving correction ate into gains.
International-stock funds, on the other hand, took in about $1.5 billion. But here, too, the pace of inflows has slowed. Once again, diversified emerging-markets equity funds accounted for nearly all the deposits.
The renaissance continued for taxable-bond funds, which enjoyed $20.8 billion in new flows. This was the asset class' fifth-consecutive month of increasing inflows. The bleeding has even stopped for municipal-bond funds, which were flat after six consecutive months of outflows.
On the other hand, after a steep drop in silver and other commodity prices, commodities funds fell more than 5% on average, shedding more than $500 million in cash. This marked that group's largest-ever outflows and first net redemptions since December 2008.
Money Market Assets Are Stabilizing
Money-market funds shed another $2.5 billion in May, which continues a trend of outflows going back to early 2009. However, the pace of such outflows has slowed substantially over the past year.
True, the group still lost nearly $100 billion during that time. But that's nothing compared with the nearly $850 billion that evacuated these funds in the 12 months prior (June 2009 to May 2010).
At about $2.6 trillion currently, overall money market assets are about where they were three years ago, several months before the Fed began cutting rates aggressively.
After enduring nearly 2 1/2 years of near-zero yields, the assets still remaining in money-market funds may be less likely to leave en masse anytime soon. Investors in these funds may be more concerned with capital preservation than attractive yields.
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Stock Funds: It's Not January Anymore
With outflows in May and continued equity-market volatility, it's easy to wonder whether US-stock funds will return to the pattern of steady outflows seen in 2010.
Granted, outflows are not yet close to the period between 2008 and 2010, when monthly net redemptions routinely eclipsed $10 billion. But the trend has generally been negative since the group rebounded with $16.5 billion in inflows this past January.
In May, the large-value and large-growth categories were again the least popular, with about $4.1 billion in combined outflows.
The story for international-stock funds continues to be dominated by the diversified emerging-markets category. And this trend is hardly new.
Over the past year, diversified emerging-markets inflows have accounted for nearly 75% of the $42 billion in total international-stock flows. The category's asset base has now more than doubled during the past two years to $216 billion. This represents about 15% of all international-stock assets.
The past year has shown, though, that superior economic growth does not always lead to superior equity returns. While emerging GDP growth is smoking that of the moribund developed economies, developed equity markets have actually fared better.
Through the end of May, Europe-stock funds have gained 35.6% on average, versus 28.6% for diversified emerging-markets funds. However, during that same period, diversified emerging-markets funds collected about $30.5 billion in new cash, while Europe-stock funds lost about $8.2 billion.
Municipal-Bond Funds: Maybe the World Isn't Ending
Investors seem to be getting more comfortable with municipal-bond funds. As mentioned above, flows in May were flat after six months of outflows, and tax-exempt money-market funds actually had about $1.6 billion in inflows.
The trend has been improving, in fact, ever since Meredith Whitney's apocalyptic forecast last December predicting mass muni defaults. Outflows peaked at $13.2 billion that month, and have been gradually lessening ever since.
A closer look at May's results shows that several muni national categories actually had positive inflows. The muni short category took in about $520 million, while the national intermediate and high-yield muni categories each absorbed about $200 million.
Several positive factors may be allaying muni-investor fears:
- First, state tax revenues have been surprisingly strong in recent months, and cost cutting is having an impact.
- Second, muni issuance has fallen considerably this year after the end of last year's Build America Bond program, which pulled much of this year's issuance into 2010.
- Finally, municipal-bond funds have enjoyed a strong rally so far in 2011. The typical national intermediate fund was up 3.4% through the end of May, beating the 3.1% gain for the average credit-heavy bank-loan fund.
Taxable-Bond Funds: Backing Off Credit Risk, Ever So Slightly
Speaking of which, there are early indications that investors' infatuation with credit risk may be fading. Flows into bank-loan and high-yield funds, in particular, have been slowing now for several months.
Alternatively, in a possible sign that risk aversion could be creeping in, comparatively conservative intermediate-term bond funds led all taxable categories with $4.4 billion in inflows. Short-term bond funds also got into the act, with nearly $2.4 billion in inflows.
If these early results develop into a stronger trend, then investors would be demonstrating admirable restraint given the still-anemic yields.