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.

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.

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.