Demand for international exposure prompted U.S. mutual fund investors to add only $6.8 billion in net new cash to stock and bond mutual funds in November 2010, according to the research released Monday from Strategic Insights.
This represents a significant slowdown from October flows, which totaled $28 billion, says the research group, which measures monthly flows into open-end and closed-end mutual funds, excluding ETFs and funds underlying variable annuities.
A growing focus on international diversification, particularly increasing allocation to emerging markets, led to $8.7 billion in net inflows into U.S.-based international and global stock funds in November, according to Strategic Insights.
This marked the sixth-straight month that international and global equity funds saw positive flows, the New York-based group says. In the first 11 months of 2010, investors have put a total of $58 billion into international and global equity mutual funds.
Meanwhile, U.S. equity funds experienced net outflows in November, estimated at under $1 billion. This was an improvement from October and the smallest amount of net outflows since April.
“Rebalancing out of U.S. equity funds in the wake of the financial crisis has been fairly modest considering the volatility and uncertainty in the markets since early 2009,” said Avi Nachmany, SI’s director of research, in a press release. “And as financial confidence slowly rebuilds, U.S. equity funds should benefit in the coming years.”
In November, Strategic Insights predicted that the global mutual fund industry was on pace for $850 billion in net inflows to stock and bond mutual funds -- including ETFs and funds underlying variable annuities -- in the full year 2010. More than half of those flows were expected to end up in funds domiciled outside the United States.
In 2009, $890 billion went into stock and bond funds worldwide.
Bond-fund total returns turned negative in November, and bond funds experienced net outflows of about $1.3 billion.
Investors redeemed $7.4 billion from muni-bond funds and added modestly to taxable-bond funds.
According to Strategic Insights, this marked the first month of net outflows for bond funds in two years, since December 2008, when outflows from both taxable and muni-bond funds totaled $6.8 billion.
The net outflows from muni-bond funds were largely triggered by modest declines in their net asset values, as well as by liquidity conditions, “including the coming end of the Build America Bonds program and an unusually large slate of pending muni new issues,” the group shared in a press release.
Taxable-bond funds saw net inflows of $6 billion in November, as investors continued to favor short- and intermediate-maturity bond funds for alternatives to low-yielding cash vehicles.
"Since early 2009, bond mutual funds around the world attracted more than $1 trillion of new money. While November experienced a pause in such persistent demand, sustained risk aversion and insatiable current income needs suggest a continuation of inflows to such funds in 2011," Nachmany explained in a statement.
"Yet, as interest rates inch higher in the coming years, managing bond fund investor expectations, reorienting investment strategies of existing bond funds, and introducing a new generation of more flexibly managed income funds are among the most important challenges of the wealth management industry," he added.
Through the first 11 months of 2010, bond funds in the U.S. attracted net inflows of $230 billion (not counting additional inflows to bond ETFs and bond VAs funds).
With the Federal Reserve aiming for low interest rates in early 2011, Strategic Insight expects further demand for higher-yielding investments to continue to fuel flows into bond funds.
Money-market funds saw net inflows of $25.6 billion in November, the first month of positive flows since these funds took in net $15.5 billion in August.
Exchange Traded Funds
Strategic Insight estimated that investors poured an additional $7.2 billion into U.S. ETFs in November.
Flows were driven by equity ETFs, while bond ETFs saw net outflows.
At the end of November, U.S. ETF assets stood at a record $940.5 billion, and are on pace to cross the $1 trillion mark some time in the first quarter of 2011.
“Roughly 84% of ETF assets are in equity ETFs, so any improvement in investor confidence that increases demand for equities will propel ETF flows and assets,” said Loren Fox, senior research analyst at Strategic Insight, in a press release.