Last year was not a great one for the mutual fund industry, as investors yanked $226 billion out of stock and bond funds, resulting in the first annual net outflow from long-term mutual funds since 1988, according to data from the Investment Company Institute (ICI). Withdrawals from load stock and bond funds were almost three times as great as withdrawals from no-load stock and bond funds, with $146 billion and $53 billion respectively.
But investor appetites for stock and bond funds returned in the second quarter of this year, coinciding with an equity market rebound: the S&P 500 index rose roughly 32 percent off of its March lows. In the three months ended June 30, investors ploughed $136 billion into bond and stock mutual funds (plus an additional $14 billion net inflows to exchange traded funds), according to Strategic Insight and Investment Company Institute data. Bond funds drew net inflows of nearly $90 billion, while equity funds took in an estimated $47 billion. This marked the best quarter for long-term funds since the first quarter of 2007, when stock and bond funds drew in a combined net $150 billion.
The rebound in the market “helped bolster investor confidence to tip toe back into riskier asset classes like stock funds,” says Loren Fox, senior research analyst at Strategic Insight.
Investors were particularly keen to snap up international equity funds in the second quarter, with about one third of equity fund flows moving into international stock funds, according to a report from Strategic Insight. Among international funds, investors took the greatest interest in emerging markets. Over 60 emerging market equity funds each gathered over $100 million in new flows year-to-date, as returns reached 50 percent to 60 percent in the second quarter, according to the report.
Lee Rosenberg, co-founder of Jericho, NY-based independent ARS Financial Services says his firm started increasing portfolio allocations to international stock funds in May. Among others, he likes the Franklin Templeton BRIC Fund and Eaton Vance Emerging Markets Fund. Kevin Mahn, chief investment officer and the portfolio manager for the three open end mutual funds at Hennion & Walsh Asset Management in Parsippany, NJ, recommends a diversified ETF, like iShares MSCI Emerging Markets Index. Both Rosenberg and Mahn said they have noticed an increase in appetite for funds that are invested in the BRIC four: Brazil, Russia, India, China.
And yet, investors otherwise remain risk-averse, says Mahn. “People are gravitating towards putting their money back into the market, but they’re doing it a lot more cautiously then they had done in previous market recoveries,” says Mahn. “You’re starting to see money move into bond mutual funds, investment grade funds and tax-free funds as opposed to equity funds, but I believe that is going to start to reverse its course.” Mahn thinks there will be a pull back in the third quarter, but by the end of the year, it will be time to start aggressively moving money into equities.
When it comes to bond funds, Mahn says he only use ETFs and ETNs. “I don’t think for a government bond fund, for an investment grade corporate bond fund, or for a municipal bond fund that is oriented towards growth you need to pay an active manager to put together a portfolio for you. You can just use an ETF to accomplish that,” Mahn says.