The Markets November 10, 2011

Investors Redeem $18.2B From U.S. Stock Funds in October

Long-term mutual fund inflows were just $745 million in October, according to Morningstar. 
Reported by

However, this net figure masked huge disparities in stock and bond flows. The combined $21.1 billion in U.S.-stock and international-stock outflows roughly mirrored the total $23.7 billion in taxable- and municipal-bond fund inflows. With $21.7 billion in inflows, taxable-bond funds had their best month since September 2010. Money market funds shed $19.1 billion. Municipal-bond fund inflows remained in positive territory, but with a modest $2 billion in new deposits.

The $18.2 billion in U.S.-stock outflows were the largest for the asset class since July’s $22.7 billion in net redemptions. Even passively managed U.S.-stock funds, which have actually enjoyed inflows in recent years, had $3.5 billion in outflows. This was just the third month in the past three years in which passively managed equity outflows surpassed $1.5 billion. Overall, U.S.-stock outflows hit $53.5 billion for the year-to-date.

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As has been the case in recent months, the $2.9 billion in international-stock outflows would have been even worse if not for $2.1 billion in diversified emerging-markets equity inflows. (Most of the other major foreign-stock categories had outflows, outside of about $500 million that went into foreign large-value funds.) Emerging-market equities are underperforming U.S. stocks by a wide margin in 2011, but that hasn’t had any impact on monthly inflows. For the year-to-date through October, the diversified emerging-markets category has fallen 14.1%, while returns for the universally hated domestic large-growth category have been basically flat. Yet, emerging-markets equity funds have collected $18.7 billion so far in 2011 while large-growth funds have shed $30.4 billion.  

Intermediate-term and high-yield funds in October collected a combined $18.6 billion. No other bond category came close. October's haul was the category's largest since $12.4 billion in August 2010.

On the other hand, October 2011 will go down as a record month for high-yield bond funds, and there isn’t a close second. The group collected $8.8 billion in new money. To put this in perspective, the previous monthly record was $5.8 billion in March 2003.

The only two major categories with outflows were the new nontraditional bond category and short-term bond funds, which lost $1.8 billion and $1.3 billion, respectively.

Although inflows were still slightly positive for the category in October, four of the category's most prominent funds, including American Funds Capital Income Builder, Ivy Asset Strategy, IVA Worldwide, and BlackRock Global Allocation, had combined outflows of nearly $800 million.

To view the complete report, visit http://corporate.morningstar.com/octflows11/FundFlowsNov2011.pdf. 

The Markets November 10, 2011

Ghilarducci Suggests Giving Private Workers Access to State Pensions

Teresa Ghilarducci, director of The New School's Schwartz Center for Economic Policy Analysis (SCEPA), drafted a proposal to offer low-fee, low-risk personal retirement accounts to all workers by providing private-sector labor access to state-level public retirement institutions. 
Reported by

Under Ghilarducci’s plan, private-sector workers or employers could voluntarily open an account in a state-level public retirement fund such as the California Public Employees’ Retirement System or CalPERS. Workers and/or employers would contribute at least 5% of pay into an account guaranteed to earn at least 3% above inflation. At retirement, workers would have the option to convert their savings into an annuity, a guaranteed stream of income for life.   

“The recession’s effects on state budgets has diverted the discussion about pension reform to the promises made to public sector retirees,” said Ghilarducci, according to a press release. “While state officials debate how to reform public pensions, all workers deserve access to safe, effective retirement plans. Private-sector workers have been, and will continue to be, battered by the double jeopardy of increasing market risk in their 401(k)s and decreasing employer coverage. Opening a window for private workers in high performing public pension funds provides a practical blueprint to stave off an impending retirement crisis.”  

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The proposal takes advantage of existing state pension infrastructure to invest private-sector funds. States, through their employee pension plans, sponsor not-for-profit financial institutions that consistently receive the highest returns for the least cost. In fact, public pension plans outperformed 401(k) plans or IRA accounts by 20 to 40% over the last 30 years. These funds are able to use their bargaining power to lower fees, and public pension fund traders have a longer-term view, which stabilizes markets and protects individuals from swings in asset prices.  

All states could offer a similar structure overseen by an independent board of trustees and administered like the Thrift Savings Plan for federal employees. Pension contributions would be pooled and invested professionally with an emphasis on prudent and low-risk, long-term gains. This would effectively shield workers from the high fees and poor investment choices they face when left to fend for themselves in the retail market.    

Most importantly, these accounts would be portable, allowing a worker to continue investing in the account as they move from job to job. Though these funds would be kept in a separate investment pool from public sector funds, having private sector workers invested in the same system would shore up public support for state public pension funds.   

Ghilarducci previously advocated for a "Guaranteed Retirement Account" (funded by a 5%-of-pay tax on workers and employers and a $600/worker contribution from the federal government) in place of the current tax preferences accorded 401(k)-type plans (see "IMHO: The Pit and the Pendulum"). Also, she suggested allowing workers to "trade their 401(k) and 401(k)-type plan assets" for one of those Guaranteed Accounts.  

Read more about Ghilarducci’s thoughts on retirement plans  here.  

In a video, Ghilarducci, Employee Benefit Research Institute (EBRI) CEO Dallas Salisbury, and Alex Brill from the National Commission on Fiscal Responsibility and Reform discuss 401(k)s and possible replacements (see "Should We “Ditch” 401(k) Plans?"). 

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