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Why Mutual Fund Investors Shun the Bull Market


For individual investors, bond funds are still in favor.

Bull market be damned: US mutual fund investors continue to sidestep this stock market.

According to a report released by New York-based Strategic Insight on Thursday morning, investors put $30 billion into stock and bond mutual funds in February.

For the first quarter of 2010, net inflows to stock and bond funds could top $100 billion, a big reversal from the less than $10 billion garnered in the year-ago period.

But where are investors putting money to work, specifically?

It's all about fixed income products.

Loren Fox, Strategic Insight's senior research analyst, says that, with money-market funds and deposit accounts continuing to offer near-zero yields, investors are hungry for income alternatives.

In total, they put $24 billion into bond funds in February. Leading the inflows, says Fox, were short- and intermediate-maturity corporate bond funds, with $10 billion in combined net inflows.

Global bond funds captured more than $4 billion in the latest month, he says, while inflation jitters encouraged inflows of $2.5 billion to TIPS funds.

Enthusiasm for bond funds mirrors trends that unfolded last year. Full-year 2009 inflows to bond funds -- including traditional mutual funds and ETFs -- reached an all-time record of $396 billion.

The massive inflows into bond funds will continue into 2010, says Fox.

"Interest rates will not rise significantly this year," he says. "So money market funds and bank deposit accounts will continue to be not all that attractive from a yield point of view."

There is also some demand for higher-risk, higher-return investments as exemplified by allocations to international equity funds.

Investors put $6.5 billion into such funds in February. (In 2009, investors dedicated $75.3 billion to these funds).

"There are two trends at work here," says Fox. "Investors for many years now have been increasing the global diversification of their portfolios. Also, international markets have done better than the US equity markets. So that has emboldened investors to put more money into international funds."

However, in contrast to bond funds and international equity funds, investors showed little love for the home team.

Flows into diversified US equity funds were negative in February, says Fox, despite the average domestic equity fund delivering a 3.4% total return in the month and nearly 60% return for the prior 12 months.
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No positions in stocks mentioned.
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