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Amid Market Chaos, Investors Like Financial Funds

In today’s volatile and uncertain markets—with the financial system in disarray and credit markets in a vise—where are investors finding value?

In today’s volatile and uncertain markets—with the financial system in disarray and credit markets in a vise—where are investors finding value? Where you might expect: the battered financial/banking and real estate sectors and, to a lesser extent, the healthcare/biotech sector, according to data from AMG Data Services, which tracks mutual fund and ETF flows for 19,000 U.S. registered open-end funds and exchange-traded funds.

The real estate sector began to see net inflows as early as April, while financials took their turn in July and August, says Robert Adler of AMG. “Before the market crashed, moving into September—before this debacle—what we’re witnessing in fund flow activity is a bottoming process,” says Adler. “What this indicates is that mutual fund investors were seeing value in these sectors, and irrespective of the market, were beginning to enter. I hadn’t seen such a bottoming process since 1992. Clearly, they were early.”

Fund flows changed during September, obviously, when the financial system began to fall apart in earnest with Lehman Brothers’ collapse and the sale of Merrill Lynch to Bank of America, and the market began to plummet. But Adler says this hasn’t altered the underlying value that investors had begun to detect in the financial and real estate sectors of the economy.

Investors apparently still see value in the carnage. Net inflows to financial sector funds accelerated during September, taking in a net $122 million, up from $117 million in August. Real estate funds, meanwhile, bled a net total of $224 million in September after taking in an aggregate $5.66 billion over the previous five months. Health care/biotech funds were the most recent to show positive inflows, with $777 million in net inflows during the month of August. In September, investors got skittish, withdrawing $138 million. “This was the newest sector where value had been seen, but investors quickly began to step out,” says Adler.

Overall, equity mutual funds got clobbered in September, losing a net $22.23 billion in cash outflows. During that same period, international funds lost a net $7.46 billion, taxable bond funds lost $9.26 billion and money market funds lost a whopping $157.04 billion, according to AMG.

But the trend of giant outflows from money market funds reversed itself during the final week of September, following news that the U.S. Treasury department had set up a guaranty fund for all money market funds. Money market funds added a net $4.40 billion in cash during the week ending October 1. And yet, investors were only putting money into Government Money Market Funds, which saw inflows of $84.69 billion for the week, versus net cash outflows of $80.29 billion for general money market funds.

ETFs as an investment category actually recorded the strongest inflows for September, reeling in a net $51.1 billion in investor money. But Adler points out that in the current market, ETFs are primarily being used as hedging vehicles by institutional investors. Most of the new cash flowing into ETFs in September went to the SPDR Treasuries Series I ETF with $18.38 billion, as well as the Select Sector SPDRs Financial ETF, which gained $4.43 billion, the Powershare QQQ, which added $3.54 billion, and StreetTRKS Gold Shr, which saw net inflows of $2.50 billion.

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