The Markets October 13, 2010

September Funds Continue to Favor Outflows

Long-term funds had inflows of $14.3 billion in September; the fourth consecutive month of positive long-term inflows, according to data from Morningstar.
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A Morningstar news release said U.S. equity outflows continued to pick up steam, despite the best September for stocks in 71 years. September continued the outflow trend which began in April, and the broader multi-year drift away from domestic equities. Investors pulled $16.3 billion from this group after withdrawing $14.3 billion in August. Investors have now redeemed $65.1 billion from domestic equity funds over the past five months, which includes early May’s flash crash, according to Morningstar.

Thanks to investors’ $1.5 billion contribution to international stock funds in September, that asset class had slight inflows (nearly $600 million) for the third quarter overall. By contrast, U.S. stock funds had nearly $43 billion in outflows for the quarter.

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Morningstar said investors have pulled nearly $81 billion from U.S. stock funds, but contributed $34 billion to international-stock funds. Meanwhile, taxable-bond funds took in $23.5 billion with another $2.5 billion bolstering municipal bond funds.

According to the Morningstar report, there has been some movement within the taxable-bond ranks. Investors seem to be easing up on risk aversion. While intermediate-term bond funds dominated inflows again with $7.5 billion in September, short-term bonds are being supplanted by all manner of credit risk. Investors shoveled almost $3.5 billion into high-yield bond funds, which helps explain why below-investment-grade companies have been having a relatively easy time rolling over their debt.

Investor interest in overseas fixed-income shows no sign of flagging, Morningstar said. With the possibility of additional quantitative easing by the Fed contributing to a 4.1% decline in the dollar in September, investors funneled $3 billion into world bond funds and $1.1 billion into emerging-markets bond funds. Both categories are increasing their market share by leaps and bounds at the expense of categories such as intermediate government. The world-bond category’s market share has grown by 23% over the past year, while intermediate government has fallen by nearly 17%.

Large-growth funds, which have been a favorite investor punching bag this year, actually saw net inflows of $10.7 billion from October 2007 through August 2008. Investors have redeemed more than $80 billion since then, though. The opposite scenario has played out for bank loan and ultra-short bond funds. The latter category suffered $8.4 billion in outflows through August 2008, but has since seen $17.5 billion in inflows.

Despite their shaky performance, investors have shown abiding faith in alternative funds. Despite losing 12.4% annualized over the past three years, bear-market funds still accumulated nearly $3.5 billion in new money. Long-short funds enjoyed even greater popularity with $21.8 billion in inflows; that’s despite the average fund dropping an annualized 3.6%, Morningstar said. Meanwhile, the conventional moderate allocation offering fared better, losing 2.3% on average. The category saw a whopping $56 billion in outflows. 

The Markets October 13, 2010

Year-End Setting is Prime for Planning

iShares said today that the current tax environment, combined with the characteristics of 529 college savings plans, can be most useful during this time of year. 
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Stephen Jobe, director of 529 programs at iShares, said in a news release that, “With the country in full gear preparing for healthcare reform and additional tax changes under consideration, this year-end season will be a crucial one for tax strategy.”  He added, “529 plans were created specifically to make saving for higher education easier, and they come equipped with important tax incentives that CPAs and advisers can maximize during their planning process.”

iShares pointed out several tax incentives that should not be forgotten about for those thinking about starting a 529 plan:

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  • Capitalize on accelerated gifting: Using a unique provision for accelerated gifting, individual investors can immediately reduce their taxable estate by $65,000 per beneficiary ($130,000 for a married couple) in a single year without losing control of those assets.
  • Liquidate UGMAs with gains now before taxes increase: Custodial accounts intended for higher education expenses may gain more through a conversion to a 529 plan, where assets have the potential to grow tax-deferred and qualified education expense withdrawals are free from federal tax.
  • Make the most out of RMDs: Discretionary required minimum distributions may earn more by reinvesting in a 529 plan, where account owners can also establish a financial legacy for future generations.
  • Maximize the earnings of Trust assets: Because many Trusts hold investments which put them in the highest tax bracket, those Trusts may benefit from reinvesting a portion of the assets – specified for higher education – in a 529 plan.

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