Investors Embraced Equity & Credit Risk in July: Morningstar

Among fund families, JPMorgan, Dimensional Fund Advisors, Oakmark, Principal Funds and MFS are growing market share

Morningstar says U.S. mutual fund asset flows approached $16 billion in July 2013, driven by inflows of close to $8 billion into international-equity funds. During the month, outflows from taxable-bond funds slowed considerably to $1.3 billion from outflows of $43.7 billion in June.

“The slow but steady growth of the economy and improving stock market valuations have likely made investors more comfortable with taking credit risk as they seek a cushion from interest-rate risk,” explained Michael Rawson, CFA, author of last Wednesday’s research report.

“The Detroit bankruptcy filing kept municipal-bond funds in heavy redemptions, however, as investors pulled $10.3 billion,” Rawson added. “While on the surface flows to taxable-bond funds appeared to moderate, at the category level investors continue to rotate out of intermediate-term bond and intermediate government-bond funds, opting instead for funds in bank-loan, nontraditional, high-yield, short-term bond, or equity categories.”

Motown Blues

July was the fifth straight month of outflows from municipal-bond funds, during which time investors have withdrawn nearly $30 billion, the Morningstar research analyst says. The Barclays Municipal Index lost 0.88% in July.

To put this decline in historical context, investors pulled $44.6 billion from municipal-bond funds between November 2010 and May 2011.

Last month, the Gold-rated Franklin High Yield Tax Free Income Fund lost $262 million to outflows, and the Gold-rated Fidelity Municipal Income Fund lost $314 million. The $1.3 billion Franklin Michigan Tax-Free Inc. had outflows of $66 million, or 5% of assets.

Morningstar analysts assign fund ratings of Gold, Silver, Bronze, Neutral or Negative.

Other Funds, Bonds

Flows into intermediate-term bond, intermediate government, long-term bond, and long-term government funds declined in July, when equity and less traditional taxable-bond categories saw inflows. In a reversal from June, when close to $12 billion left high-yield bond funds, investors added $4.5 billion to the category last month.

Within equities, value funds led the pack: “The $3.3 billion flow to large value was the strongest the category had seen since February 2007,” Rawson said.

The SunAmerica Focus Dividend Strategy, for instance, experienced $505 million in flows. The fund holds 30 stocks, has more than doubled its assets over the past year and returned 32.3% in the past year through July (vs. 25.0% for the S&P 500).

The Silver-rated Vanguard Equity Income gained $461 million of inflows, while the Gold-rated Dodge & Cox Stock – with returns of over 35% in the past year -- brought in $425 million.

Funds in the large-growth and mid-cap growth groups had outflows, though the Bronze-rated JPMorgan Large Cap Growth attracted $1.4 billion.

“Among sector funds, Fidelity Select Biotechnology brought in $429 billion. The fund has nearly tripled in assets from a year ago thanks to strong flows and a 56.4% return,” the Morningstar fund-flows report shared.

In the energy universe, the Oppenheimer Steelpath MLP Income and Oppenheimer Steelpath MLP Alpha each brought in more than $200 million in new assets for the month. Plus, they’ve seen their assets more than double in the past year.

Fund-Family Leaders

JPMorgan was the top provider with $3.4 billion of flows, according to Morningstar’s July data. This helped push the firm’s market share to 2.00% from 1.86% a year ago.

Other large firms with growing market share are Dimensional Fund Advisors, Oakmark, Principal Funds and MFS.

“Flows to Vanguard turned positive last month after a rare outflow from the complex in June. Still, flows to Vanguard’s taxable- and municipal-bond funds were negative while flows to equity categories were positive,” Rawson explained.

Heavy redemptions continued at PIMCO, he notes, with investors yanking $7.5 billion from the PIMCO Total Return Fund, its third-consecutive month of outflows for the fund.

From early 2012 through April 2013, the fund attracted $21.5 billion of inflows vs. $18.4 billion of outflows. It returned 0.49% in July, edging out the Barclays US Aggregate Bond Index. Year to date, however, its return is -2.55% vs. -2.31% for the benchmark.

PIMCO investors pulled more than $900 million from both Gold-rated PIMCO Real Return and Silver-rated PIMCO Investment Grade Corporate Bond, yet added funds to Bronze-rated PIMCO High Yield,” the Morningstar report stated.

“The $307 million inflow into PIMCO High Yield was the largest since September 2012,” Rawson shared. “Bronze-rated PIMCO Unconstrained continued to have inflows while PIMCO Credit Absolute Return Fund saw inflows of $600 million, a nearly 45% one-month growth rate in assets for the fund that launched in August 2011 under Mark Kiesel, Morningstar’s 2012 Fixed-Income Fund Manager of the Year.”

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