Even with the market declines of February 27 and the resulting swings, more than 90 percent of all equity funds posted positive returns, according to Lipper. The average equity fund, in fact, had returns of 2.41 percent, beating the major indexes, says Tom Roseen, a senior research analyst with Lipper in Denver (see chart).

Nonetheless, fund flows tracked by Cambridge, Mass.-based Emerging Portfolio Fund Research, show that global fund investors have been holding back. They put nearly $25 billion into the 15,000 funds in EPFR’s database during the first three months of 2007. But that’s down roughly 60 percent from the close to $60 billion invested in the first quarter of 2006 (see chart).

“Groups with strong inflows include global equity funds with $14.9 billion through March 30,” says Brad Durham, managing director of EPFR. “Funds that are invested across a lot of different regions … are still racking in new money and have for more than two years. There’s a consistent shift in allocation from the United States and some other developed markets into these areas.”

In 2006, some $120 billion of net flows went into global equity and emerging-market funds, Durham adds. As for U.S. equity funds, they experienced $16 billion in net outflows last year, while this year’s inflows stand at $2 billion.”

Given the market’s recent volatility, some investment experts have been predicting that growth investing would return to favor. As the Lipper data shows, growth funds in and outside the United States outperformed their value counterparts in the first quarter of 2007.

Still, Durham doesn’t expect investors to pour their resources into the growth sector. “This is largely exaggerated,” he says. “Our data do not show that turn of events for growth funds. Value funds across all market-cap groups have been seeing the most net inflows, and that’s been the trend for a few years.” Nonetheless, this trend is worth watching, Durham concedes.

Balanced funds, he notes, are having a strong year so far after seeing persistent outflows in 2006, which totaled $4 billion. This year, the balanced funds have inflows of $2.2 billion. “The flows are more cautious as some investors move to the sidelines,” says the EPFR executive.

As for emerging markets, outflows in the first quarter stood at $1.7 billion versus inflows of $23.3 billion in the same period a year ago. A recent report from portfolio manager Vincent McBride of Lord Abbett, shares these short-run concerns with emerging-market investments in 2007:

o After near-record highs in 2006, net private capital flows into emerging markets are likely to move lower this year as global economic growth moderates, which could have a dampening effect on asset prices;

o Valuations in a number of emerging markets are already high on both an absolute and historical standard;

o With materials and energy accounting for a significant portion of the MSCI Emerging Market Index, any drop in commodities prices could be another drag on performance; and

o Another impediment to risk appetite would be the spread between emerging market bond yields and equity markets. Considering that such spreads are currently at all-time lows we would caution that any deterioration also could lead to pullbacks in the equity markets.

Janet Levaux is the managing editor of Research; reach her at jlevaux@researchmag.com.