February 22, 2012

Muni Funds Record Fifth Straight Month of Inflows

‘Reverting to the mean’ after default nonevent

As investors continue their desperate search for yield, municipal bond funds hit their fifth consecutive month of inflows, racking up more than $100 million in January, according to Boston-based Cerulli Associates.

“Some of the yields currently available in the municipal space are competitive with what can be found in the taxable bond space, which is one reason for the consistent flows,” says Cerulli senior analyst Alec Papazian. “As money comes back to the market as a whole, a lot is going to fixed income, so muni bond funds would naturally benefit from that.”

Papazian notes the taxable bond space is still outdoing its tax-free counterpart, due to the fact the taxable space is so much larger, but the overreaction to default predictions in 2011 means a natural reverting to the mean in the muni sector.

“There were massive outflows last year,” he says. “Even though the last few months of 2011 saw inflows, the number was still negative overall for the year.”

The top three categories receiving net inflows in January were municipal national intermediate ($1.8 billion), short-term issues ($1.5 billion) and high yield ($1.3 billion).

“The Vanguard Intermediate Term Tax-Exempt fund was the single fund that benefited the most from the inflows,” he adds. “It received three times the amount of its nearest competitor. Vanguard received $647 million in inflows and Nuveen, the No. 2 sized fund in the space, received $206 million.”

Other information in Cerulli’s latest release includes: 

  • Sector mutual funds and ETFs attracted $25.3 billion in 2011. While overall net flows into these funds are down 5.2% from 2010's levels of $26.7 billion, specific sectors are attracting more interest. 
  • While there continues to be negative press around the housing market, real estate mutual funds and ETFs have gained traction. 2011 net flows into real estate and global real estate mutual funds are more than net flows garnered from all other sector funds. 
  • Mutual fund assets recovered from the last two months of decline, growing 4.3% in January. In addition, flows into mutual funds finally turned positive during the month ($34.0 billion) after three consecutive months of net redemption.
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