US Stock, Bond Mutual Funds Draw $7B in Nov. 2010

Led by demand for international exposure, US mutual fund investors added about $7 billion in net new cash to US stock and bond mutual funds in November 2010 (excluding ETFs and funds underlying variable annuities), according to Strategic Insight.
Dec. 10, 2010 - PRLog -- Propelled by demand for international exposure, US mutual fund investors added about $7 billion in net new cash to US stock and bond mutual funds in November 2010 (in open-end and closed-end mutual funds, excluding ETFs and funds underlying variable annuities). Because of a slowdown in investors’ appetite for bond funds, November’s net inflows were a decrease from the $28 billion of net new flows into long-term funds seen in October, according to Strategic Insight, a business intelligence provider to the worldwide fund industry.

An increasing focus on international diversification, including a growing allocation to emerging markets, led to $8.7 billion in net inflows into US-based international and global stock funds. This marked the sixth straight month that international and global equity funds saw positive flows. In the first 11 months of 2010, investors have put a total of $58 billion into international and global equity mutual funds.

While US equity funds experienced net outflows in November, estimated at under $1 billion, this was an improvement from October and the smallest amount of net outflows since April. “Rebalancing out of US equity funds in the wake of the financial crisis has been fairly modest considering the volatility and uncertainty in the markets since early 2009,” said Avi Nachmany, SI’s Director of Research. “And as financial confidence slowly rebuilds, US equity funds should benefit in the coming years.”

With bond fund total returns turning negative in November, bond funds experienced net outflows in aggregate of $1.3 billion. Investors net redeemed $7.4 billion from muni bond funds but added modestly to taxable bond funds. This marked the first month of net outflows for bond funds in two years, since December 2008 – the depths of the global financial crisis – when outflows from both taxable and muni bond funds totaled $6.8 billion. The net outflows from muni bond funds were largely triggered by modest NAV declines, as well as by liquidity conditions, including the coming end of the Build America Bonds program and an unusually large slate of pending muni new issues. Taxable bond funds saw net inflows of $6 billion in November as investors continued to favor short- and intermediate-maturity bond funds for alternatives to low-yielding cash vehicles.

"Since early 2009, bond mutual funds around the world attracted more than $1 trillion of new money. While November experienced a pause in such persistent demand, sustained risk aversion and insatiable current income needs suggest a continuation of inflows to such funds in 2011," commented Mr. Nachmany.

"Yet, as interest rates inch higher in the coming years, managing bond fund investor expectations, reorienting investment strategies of existing bond funds, and introducing a new generation of more flexibly managed income funds are among the most important challenges of the wealth management industry," Nachmany said.    

Through the first 11 months of 2010, bond funds in the US attracted net inflows of $230 billion (not counting additional inflows to bond ETFs and bond VAs funds). With the Federal Reserve aiming for low interest rates in early 2011, Strategic Insight expects further demand for higher-yielding investments to continue to fuel flows into bond funds.

Money-market funds saw net inflows of $25.6 billion in November, the first month of positive flows since these funds took in net $15.5 billion in August.

ETFs: Separately, Strategic Insight estimated that investors poured an additional $7.2 billion into US Exchange-Traded Funds (ETFs) in November. Flows were driven by equity ETFs, while bond ETFs saw net outflows. At the end of November, US ETF assets stood at a record $940.5 billion, and are on pace to cross the $1 trillion mark some time in the first quarter of 2011. “Roughly 84% of ETF assets are in equity ETFs, so any improvement in investor confidence that increases demand for equities will propel ETF flows and assets,” said Loren Fox, senior research analyst at Strategic Insight.

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Strategic Insight, an Asset International company, is a leading research firm for the mutual fund and wealth management industry, providing clients with in-depth studies, consultation, and electronic decision support systems.
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