The Markets December 12, 2011

U.S. Stock & Bond Mutual Fund Flows Down in 2011

The U.S. mutual fund industry is on track for $80 billion in net inflows for the year; more than $100 billion less than 2010 or 2009.
Reported by

2010 saw $246 billion in net inflows to long-term mutual funds and 2009 had $364 billion, according to Strategic Insight, an Asset International company.

One reason that smaller net-flows are expected for 2011 compared with 2010 is a significant drop in flows to bond funds—a sign that volatility fatigue has pared investors’ willingness to participate in financial markets, even though investors have continued to turn to bond funds as a source of income at a time of extremely low yields. In addition, 2011 featured accelerated net outflows from U.S. equity funds, and a slowdown in net inflows to international/global equity funds, versus 2010—a result of investors’ reduced appetite for risk, as well underperformance by international funds versus U.S. funds (and U.S. Dollar appreciation), SI said.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

Investment and economic uncertainty continue to lead Americans to hoard cash in the banking system, as deposit accounts expanded by about $2 trillion in the past few years.

“The drop in stock and bond mutual fund flows in 2011 reflects both a pause for some investors, as well as a shift for othersin terms of what will engage investors and bring them back to the markets,” said Avi Nachmany, director of research for Strategic Insight. “Increasingly, alternative, non-traditional, flexible and global strategies are becoming more important parts of the investor portfolio. Today, the mutual fund industry is rife with product innovation that is creating a slew of funds that will help redefine asset allocation.”  

According to Strategic Insight, investors continue to look at the patterns of market returns rather than cumulative returns. The S&P 500 Index ended November with a 1.1% gain for the first 11 months of 2011, but that included a large number of wide daily movements and just five months of positive total returns in 2011—compared with eight positive months in 2010 and nine positive months in 2009.

Investors took net $7 billion out of long-term mutual funds in November 2011. Taxable bond funds drew $9 billion in net inflows in the month, roughly half of the inflows seen in October. Muni bond funds saw $3 billion in net inflows, amid reduced worries about widespread muni bond defaults.

Equity mutual funds saw net outflows of $19 billion, with $16 billion of net redemptions coming out of domestic equity funds. “With the market still gyrating, investors still enthusiasm for U.S. equity funds,” said Nachmany. “In the meantime, we expect reduced portfolio volatility to be a greater priority for investors.”

Money-market funds saw net inflows of $42 billion in November, as retail investors turned to money funds as a safety net, even as institutional money market funds continued to see sluggish demand. In the first 11 months of 2011, money market funds experienced $173 billion in aggregate net outflows.

Separately, Strategic Insight said U.S. Exchange-Traded Funds (ETFs) in November experienced $5 billion in net inflows. Leading the way in net inflows were bond ETFs (just over $5 billion in inflows). Equity and commodity ETFs saw slightly negative net flows.

Through the first 11 months of 2011, ETFs (including ETNs) saw net inflows of $93.5 billion, a pace that could produce the fifth straight year of $100 billion or more in inflows to ETFs. At the end of November 2011, U.S. ETF assets stood at $1.06 trillion.

Products December 12, 2011

Morningstar Launches Sector Classification System

Morningstar, Inc. has launched a sector classification system for the universe of fixed income funds. 
Reported by

The sector classification system includes U.S. open-end mutual funds, ETFs, variable annuity subaccounts, separate accounts, collective investment trusts and insurance group separate accounts. The new system provides a detailed view of a fund’s strategy and investments. It also addresses the needs of global investors by including sectors for world and emerging market bond funds.

“As many investors found out the hard way in 2008, two bond funds may be in the same category, but have very different holdings and risk exposure,” said John Rekenthaler, vice president of research for Morningstar. “Morningstar’s new classification system helps investors to better understand a fixed income fund’s investments and more accurately compare it with other funds in the same category.”

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

The classification methodology is based on a three-tier system starting with six Super Sectors, including Government, Municipal, Corporate, Securitized, Cash & Equivalents and Derivatives. Below the Super Sectors are 17 Primary Sectors, which then break down into 72 Secondary Sectors. Morningstar applies its sector classification system to all fixed-income funds globally, as well as funds with significant bond exposure such as allocation funds. Under the old two-tiered system, fixed-income securities and derivatives in a fund’s portfolio were mapped into one of 13 Sectors, which rolled up into four Super Sectors.

The new sector assignments are available in Morningstar’s web-based products, and the company expects to roll them out in all of its products in the coming months. The Morningstar Global Fixed Income Sector Classification methodology is available at http://corporate.morningstar.com/FIClassification. 

«