A Morningstar news release said the difference is owed to a slower pace of U.S. equity redemptions and one big distortion in international stock flows.

According to Morningstar, outside of U.S. equities, every asset class had positive inflows. International-stock funds had their best month since April, although this owed primarily to continued strong flows into diversified emerging-markets equity funds.

Balanced funds also turned in their best month since April, with $2.3 billion in positive flows, according to the data. As has been the recent trend, investors embraced the two poles within the group–world-allocation and conservative-allocation funds. BlackRock Global Allocation led the world-allocation category with nearly $1 billion in inflows.

Demand for taxable-bond funds remains steady with $20.6 billion in contributions. According to the data, intermediate-term bond funds continued to lead the way, with $5.6 billion in inflows, but short-term bond funds have been supplanted in the rankings by world-bond and multisector bond funds, which absorbed $3.7 billion and $3.1 billion, respectively.

Ebbing Muni Bond  Interest  

On the other hand, investor enthusiasm appears to be ebbing for municipal-bond funds. While this group took in $1.8 billion in October, inflows have been declining since September 2009. This could be considered somewhat surprising, given the possibility of higher tax rates in the future, but it may also owe to concerns over municipal finances.

The pace of U.S. equity fund redemptions declined significantly in October to $6.3 billion from $18.3 billion the previous month. In fact, this past month’s outflows were the smallest since May’s flash crash. But this still marks the sixth consecutive month of outflows, despite a powerful recent U.S. equity rally, Morningstar said. .

Nevertheless, investor aversion to U.S. equities remains, as $64.2 billion has now left these funds in 2010. However, passively managed funds remain popular, enjoying inflows of $2.2 billion versus $8.5 billion in outflows for actively managed funds. While investors are embracing risks in other parts of the market, U.S. equity manager risk is not one of them, Morningstar commented.

For those leaving U.S. equities, large-cap funds continued to be a favorite source of liquidity. The three major large-cap categories accounted for the vast majority of outflows, a combined $6.7 billion, Morningstar said. As occurred last month, large-growth funds endured the worst of it. This category’s $7.3 billion in September outflows was more than the combined redemptions in the large-value and large-growth categories. Although the absolute level of outflows fell in October, the trend was even more acute, as the $4.3 billion that fled large-growth funds was almost twice the combined $23 billion that left the large-value and large-blend categories.

Outside of the United States, demand for emerging-market equities remains strong with $2.3 billion in October inflows. However, that understates their increasing popularity. Vanguard announced in late September that it would replace Vanguard Emerging Markets Stock Index, Vanguard European Stock Index, and Vanguard Pacific Stock Index with Vanguard Total International Stock Index in its target-date lineup and with three funds-of-funds.

Morningstar said this led to significant swings within the international stock asset class. Vanguard Total International Stock Index gained $10.7 billion in flows last month versus $2.5 billion in outflows for Vanguard Emerging Markets Stock Index.  

As yields have fallen in recent years, investors have become bolder. However, rather than go farther out on the yield curve, they have instead gone down the credit ladder. Inflows into long-term bond funds of all stripes remain fairly tepid. On the other hand, within both the taxable- and municipal-bond universes, this quest for yield has come at the expense of short-term bond funds.