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business newsSteering Clear of US Stocks
By
Josh Lipton Jul 16, 2010 2:50 pm
For investors, it's all about fixed income.
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Following in the footsteps of May, the equity markets suffered further sell-offs in June, during which the S&P 500 and the MSCI EAFE produced total returns of -5.2% and -1.0%, respectively. This contrasts with a 1.6% return for the Barclays US Aggregate Bond Index. (Hat tip: Jefferies.)
So, unsurprisingly, your friends and neighbors didn’t show much love for risky assets: They yanked $3.1 billion out of equity funds in June, according to the most recent data from Strategic Insight, a New York-based mutual fund research firm.
“There hasn’t been genuine excitement about equity funds,” says Loren Fox, Strategic Insight’s senior research analyst.
Enthusiasm for bond funds, though, remained strong: net new inflows of $18.8 billion during the month.
(As a side note -- Jefferies analysts point out in a research report -- among the money managers, the best performers for the month included Affiliated Managers Group (AMG), Eaton Vance (EV) and T. Rowe Price Group (TROW), which were the only firms to generate inflows into both equities and fixed income.)
The trend in retail fund flows in June mirrors what we’ve seen so far all year: first-half 2010 inflows were led by taxable bond funds with net inflows of $120 billion. Many of those flows, says Strategic Insight, went to short- and intermediate-term corporate bond funds, as they drew investors fleeing near-zero yields in cash accounts.
Fox tells us that he expects sizable inflows to bond funds to continue.
“The Fed is nowhere near signaling that they will raise interest rates,” Fox says. “So the motivation to go into bond funds, for higher yield than you can find in bank accounts and money market funds, will continue for the rest of the year. Also, people want to participate in the financial markets in a way that’s less risky than equities.”
Fox notes that International equity funds did enjoy healthy demand with first-half net inflows of $34 billion. However, it was a different story for US equity funds in the first-half, with net inflows of just $4 billion.
The question of when the general investing public comes back meaningfully into domestic equity funds is an interesting one as some strategists argue that what we’re now experiencing is a more secular shift in investment attitudes.A worthwhile read this week, penned by our colleagues at the Wall Street Journal, explored the significant change in how Main Street investors think about committing capital.
The article, "Small Investors Flee Stocks, Changing Market Dynamics," reported on how ordinary investors -- disillusioned with big institutions including corporations, government, banks, and political parties, as well as the nation’s heavy debt -- are returning to the cautious mentality they developed during the 1970s.
Also eating away at risk tolerance is demographics, says the Wall Street Journal: Baby boomers are aging, making them more focused on capital preservation. However, Investment Company Institute data also show lower risk tolerance among younger people as well.
In surveys of mutual-fund owners, the ICI found that just 30% said in 2009 that they were willing to take above-average or substantial risk in the stock market, down from 37% in 2008. The number willing to take only below-average risk or no risk at all climbed to 20% from 14%. (Hat tip: Gluskin Sheff.)
Separately, Strategic Insight said that ETFs took in $39 billion in net flows during the first half of 2010, slightly ahead of the $35 billion in net inflows ETFs gathered in the first half of 2009.
Net inflows to ETFs were led by gold ETFs, emerging markets ETFs, and short-term bond ETFs. US ETF assets (including ETNs) totaled $785 billion at the end of June, invested in a record 977 products.
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