Mutual Funds Inflows Strong for 2010

Two leading research firms release optimistic reports

Mutual fund full-year net inflows will come close to setting a record in 2010, according to two new reports.

The first, a pacing report from research firm Strategic Insight, found the global mutual fund industry, led by robust demand for bond funds, is on pace for $850 billion in net inflows to stock and bond mutual funds (including ETFs and funds underlying variable annuities). More than half of those flows are estimated to end up in foreign funds.

The report notes this is likely to fall just short of the $890 billion that went into stock and bond funds worldwide in 2009, but ahead of the net outflows from such long-term funds in 2008 and net inflows of around $800 billion in both 2006 and 2007.

Those figures mark a strong resumption of fund investing around the world after the shocks of 2008.

“The fact that long-term mutual funds are drawing more inflows post-crisis than pre-crisis is not surprising,” said Avi Nachmany, Strategic Insight’s Director of Research, in a statement. “The global financial crisis underscored the value of mutual funds’ liquidity, transparency and accessibility. And, post-crisis, fund providers have been introducing more flexible and global funds, as well as more holistic ‘solutions’ to meet evolving investors’ demands.”

More than 60% of long-term fund flows are going into bond funds, including short- and intermediate-duration bond funds that appeal to investors seeking higher yields than those available in bank deposits or money-market funds. Some fund buyers are also seeking out bond funds as a way to participate in financial markets without taking on equity risk, as investors continue to be weighed down by concerns about economic growth, especially in the U.S., and about debt problems, especially in Europe.

The second report, from Chicago-based Morningstar, found investors contributed $26.8 billion to long-term mutual funds in October, nearly twice the assets added in September. Every asset class other than U.S.stock saw inflows during the month, but the pace of outflows from domestic-equity funds slowed.

International-stock funds and balanced funds experienced their best month since April, with inflows of $5.7 billion and $2.3 billion, respectively. Outflows continued for money market funds, as investors redeemed $16.6 billion in October. Although the exodus has slowed, money market funds' share of total mutual fund assets has dropped to 25.7% from 33.4% over the past year.  

Diversified emerging-markets funds took in $2.3 billion in October, accounting for roughly half the inflows into international-stock funds. Vanguard Total International Stock Index Fund saw inflows of $10.7 billion after Vanguard announced that the fund would replace Vanguard Emerging Markets Stock Index Fund, Vanguard European Stocks Index Fund, and Vanguard Pacific Stock Index Fund in its target-date lineup and in three funds of funds.

Dimensional Fund Advisors broke into the top-10 list of fund families by assets under management in October. Boosted by investor preference for passively managed funds, the firm has taken in nearly $7.5 billion in 2010, and about one-third of those assets flowed to the firm's emerging-markets equity funds.

International stock topped all ETF asset classes in October with inflows of $9.2 billion. More than $25.1 billion has flowed into diversified emerging-markets ETFs since the beginning of the year, which represents 32% of all ETF inflows and nearly 76% of total net inflows into international-stock ETFs.

U.S. stock ETFs gathered assets of $3.5 billion during the month despite outflows for some of the largest funds in the group. In addition to dividend-paying ETFs and other high yielding strategies, investors allocated capital to ETFs with exposure to technology and financials, two cyclical sectors that could potentially benefit from the effects of QE2.

Commodities ETFs, the only asset class to see outflows in October, lost assets of $197 million. Outflows of $486 million from SPDR Gold Trust GLD and $331 million from United States Oil USO offset inflows into silver and natural gas ETFs.

Vanguard has collected roughly 39 cents of every dollar in net inflows to U.S.-listed ETFs this year and introduced 16 new ETFs to the market in 2010. Vanguard's ETF assets increased by more than 72% over the past year, raising the firm's market share to 14.5% of industry assets.

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