Strategic Insight (SI), a business intelligence company owned by PLANADVISER‘s parent company, Asset International, Inc., estimated that full-year 2009 inflows to bond funds will come in at an all-time record of almost $400 billion—an impressive number considering bond and stock fund flows have never before topped $300 billion in one year, according to SI. 

Those figures mark a strong resumption of fund investing by U.S. households after the paralysis-induced shocks of 2008. SI’s projections for the full year are based on SI’s Simfund database and projections for December, which include traditional mutual funds and funds underlying variable annuities, but exclude exchange-traded funds (ETFs), which SI noted benefited from over $100 billion of net inflows in 2009. 

“This has been the year of the bond fund. With $10 trillion held in cash throughout banks and retail money market funds earning near zero yields, mutual fund shareholders have been slowly recovering from the traumas of 2008 by moving off the sidelines and into the higher yields of bond funds,” noted Avi Nachmany, Strategic Insight’s director of Research. 

Short, Medium Duration Draw 

That said, more than 80% of bond fund flows have gone to taxable bond funds, including short- and intermediate-duration bond funds that appealed to investors seeking higher yields than those available in bank deposits or money-market mutual funds. The balance of flows went to tax-free bond funds, also led by shorter-duration products used for tax-exempt cash alternatives, according to SI. 

For the nearly $12-trillion U.S. mutual fund industry, bond funds’ record growth was propelled by their new sales rising 50% from 2008’s pace (based on the Investment Company Institute’s tracking of such sales). Meanwhile, demand for stock funds has been subdued, and money-market fund assets shrank by about 15%, according to SI. 

“Stock markets around the world have rebounded dramatically. But this price recovery occurred in a background of modest redemptions out of U.S. equity funds, and selected, at times speculative, buying of international and narrow global regions or sector funds,” Nachmany said. “Clearly, fund investors’ appetite for risk remains low. Search for income and low risk tolerance are likely to continue to dominate the fund landscape in early 2010, and maybe beyond. We expect little change to that dynamic until the employment and economic clouds start to clear.”

Strategic Insight estimated that U.S. equity/hybrid funds will have redeemed more than $30 billion in all of 2009, less than 1% of their assets. In contrast, inflows to international stock funds will have exceeded $40 billion in 2009, with more than half going to emerging markets as well as what SI described as “the increasingly popular “global asset allocation” funds”.  

International Attractions 

Emerging markets’ 70%+ returns year to date have drawn investors, with such gains partly supported by U.S. dollar depreciation. Overall, international funds benefit from U.S. investors increasing the global diversification of their investments, a long-term secular trend that paused in 2008 due to the financial crisis.  

After adding more $600 billion to money-market mutual funds in both 2007 and 2008, this year money fund flows reversed and such funds are estimated to have seen net outflows exceeding $500 billion in 2009. SI commented that institutional investors and some individuals withdrew a portion of the assets they’d put into money funds in 2007 and 2008 as safe havens, and instead in 2009 sought alternatives to the near-zero yields that many of these funds offered.