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Market Drives Record Fund Flows, Higher Returns in Q1

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The Dow and S&P 500 indices reached all-time highs this quarter, which boosted investor inflows and the performance of many equity fund categories, according to several reports released this week.

The Dow Jones Industrial Average had returns of 11.25% for the quarter, while the S&P 500 returned 10.03%.

For the quarter, Lipper says that 80 of its 90 equity and mixed-equity fund classifications posted positive returns. The U.S. diversified-equity fund category was up 10.16%, however the overall equity fund group tracked by the research firm averaged returns of 7.68%, underperforming the S&P 500 for the period.

“At the top of the equity fund leaderboard were health/biotechnology funds (15.53%), equity-leverage funds (+15.36%), global health/biotechnology funds (14.57%)  and mid-cap value funds (13.74%) … as investors began focusing on out-of-favor issues,” said Tom Roseen (left), head of research services for Denver-based Lipper, in a report published on Wednesday.

“Given the new concerns over the Cyprus bank bailout and Italy’s inability to form a coalition government, it wasn’t surprising to see world equity funds (3.81% for the quarter) underperform the other three macro-classifications for the first quarter in three and U.S. diversified-equity funds (10.16%) jump to the top of the podium as investors eyed attractive domestic issues,” Roseen said.

Fund Flows

According to BlackRock, exchange-traded products had inflows of more than $70 billion during the first quarter of 2013, up from $65.5 billion in the year-ago period. Equity-focused ETPs accounted for $65 billion, or 93%, of the first quarter’s inflows.

ETPs with developed market investments represented the largest share of these flows, at $60 billion, during the first three months of 2013, versus $4.6 billion for emerging-market ETPs. U.S. equity ETPs experienced inflows of $37.3 billion, BlackRock noted in the report, issued late Tuesday.

In March, for instance, global ETF flows totalled $23.5 billion, more than double February’s level.

“Investors registered renewed confidence in developed-equity markets with record ETP flows in the first quarter,” said Russ Koesterich, chief investment strategist for BlackRock’s global operations, in a statement. “Despite continued market volatility, investors recognize that the fundamentals in the United States are generally favorable, given strong corporate earnings and cheap equity valuations.

“Rather than the much-discussed ‘great rotation’ from bonds into equities, the first quarter showed investors moving cash from the sidelines into equities, and preparing for a rise in interest rates by rotating within fixed income into short-term and floating-rate ETFs,” added Koesterich.


Read BlackRock’s Koesterich: Europe’s Banks Are Its ‘Achilles’ Heel’ on AdvisorOne.