Equity Outflows Go to Fixed Income

A new Morningstar mutual fund flow report for October shows that most of the money investors yanked during the 2008 downturn from equity funds has been directed to bond offerings.

The investment research consultant said inflows to U.S. mutual funds reached $314 billion for the 12 months ended October 2009, much higher than the $154 billion pulled out in 2008.

Yields close to zero and a “roaring” market rebound have driven investors out of money market funds, the report said. After reaching a high of $3.6 trillion in January 2009, outflows for the past nine months have brought the total down to $3.2 trillion.

Morningstar researchers said October marked a subtle but important shift for equity flows.

International equities continued to bring in assets as the year-to-date flows totaled more than $15 billion. The asset group, which was bolstered by flows into world-allocation and diversified emerging-markets funds, gathered $5 billion in assets.

Morningstar said improved performance is a likely catalyst. For 2009 through October, Morningstar’s diversified emerging-markets category has been the top performer with an average gain of 69%.

Meanwhile, domestic-equity funds are dealing with a very different fate. U.S. equity funds saw outflows pick up steam with $8.1 billion headed for the exits in October. That marks the second month in a row that U.S. stock funds saw a drop in assets and the fourth month of outflows this year. As a result, U.S. equity year-to-date flows are back in the red. Large-growth and large-value funds showed the largest declines this month.

Among the largest five fund families, American Funds remains the only one to see outflows so far in 2009. Unlike other large fund firms that saw flows toward fixed-income funds compensate for outflows in equity funds, American Funds' fixed-income funds have not attracted the same amount of assets.

In October, investors pulled nearly $2 billion out of the firm's offerings, bringing the estimated outflows for 2009 to $21 billion. In a trend visible across many fund families, the hardest-hit asset classes for American Funds were domestic-equity and balanced funds.

Also on the individual fund family level, Fidelity experienced outflows for the first time since March 2009, primarily from its domestic equity funds, which saw $1.8 billion headed for the exists. The fund family's hardest hit funds for the month were Fidelity Magellan, Fidelity Equity Income, and Fidelity Spartan 500 Index. Fidelity bond funds continued to attract assets as Fidelity Series Investment Grade Bond fund brought in $526 million during October.

The top 10 funds attracting assets remained the same for October, with PIMCO Total Return, Vanguard Total Bond Market Index, and Vanguard Short-Term Investment-Grade topping the list.

Finally, Morningstar said flows into target-maturity funds slowed for the year to date, as measured by flows as percentage of beginning AUM. The longest maturity categories experienced the greatest slowdown.

In fact, contributions to funds in the 2021 to 2050+ range peaked in the first quarter of 2009 and have been flat ever since. Meanwhile, retirement income and the categories ranging from 2000 to 2020 have continued to enjoy increasing quarterly growth in flows, with retirement income leading the way.

The Morningstar data is available here.