U.S. Mutual Funds See Net Inflows of $65B in 2011

December marked the second consecutive month of net outflows from long-term mutual funds, following $3 billion in net outflows in November, according to Strategic Insight, an Asset International company.

As a result, long-term mutual funds saw net inflows for the full-year 2011 of just $65 billion (excluding ETFs and VA funds).

“Because many investors engage in year-end portfolio adjustments and tax-related moves, December is a difficult month from which to draw firm conclusions,” said Avi Nachmany, SI’s director of research. “However, it is clear that investor sentiment remains cautious. Although the S&P 500 rose 1% in December, fund shareholders are still suffering from volatility fatigue following the ups and downs of the second half of 2011. Portfolio rebalancing may result in reduced outflows from U.S. equity funds in January, especially if the U.S. stock market continues its 2012 rise.”

Equity mutual funds saw accelerated redemptions in December compared with November. Net outflows from U.S. equity funds went from $11 billion in November to $24 billion in December, and net outflows from international and global equity funds went from $3 billion in November to $11 billion in December. Flows to international equity funds were hurt by investors’ reduced appetite for risk, as well as the negative impact of U.S. dollar appreciation (in 2011, the average international stock fund lost 12%, while the average U.S. equity fund was about flat).

Among the few categories of equity funds to post positive flows in December, the leaders were utility funds, long/short funds and multialternative funds. “While there is a lack of enthusiasm for U.S. equity funds, investors continue to seek out solutions aimed at lessening portfolio volatility and reducing correlation,” said Nachmany.

For 2011, equity funds saw net outflows of $51 billion, with $85 billion of net outflows from U.S. equity funds partly offset by $34 billion in net inflows from international equity funds.

Bond funds saw net inflows of $13 billion in December, including $8 billion to taxable bond funds and $5 billion to muni bond funds. Volatility fatigue also affected bond funds. Investors continued to see bond funds as a lower-risk means to participate in financial markets, as well as a source of income in an extremely-low-yield environment. In December, bond fund flows were led by intermediate-term, high-yield and short-term muni funds. Muni bond funds have been enjoying a revival of demand as fears of widespread defaults have faded.

For the full year 2011, bond funds saw $116 billion in net inflows, including $129 billion in net inflows to taxable bond funds and $13 billion in net outflows from muni bond funds.

Money-market funds saw net inflows of $39 billion in December, as retail investors continued to turn to money funds as a safety net, even as institutional money market funds continued to see sluggish demand. December was the second consecutive month of positive net flows to money funds, following $42 billion of net inflows in November. For the full year 2011, money market funds saw aggregate net outflows of $135 billion due to near-zero yields.

Separately, SI said U.S. Exchange-Traded Funds (ETFs) in December experienced $16 billion in net inflows. Leading the way in net inflows were large-cap blend, large-cap growth and large-cap value ETFs, with combined net flows of $10.5 billion in December. The biggest ETF, the SPDR S&P 500 ETF, took in $4.9 billion in net inflows in December. Precious metals ETFs saw net outflows in December.

For full-year 2011, ETFs (including ETNs) saw net inflows of $115 billion. That followed net inflows of $111 billion in 2010 and marked the fifth consecutive year that U.S. ETFs took in $100 billion or more in net inflows. At the end of 2011, U.S. ETF assets stood at $1.06 trillion, which was up from $1.006 trillion at the end of 2010.