Investors go bonkers for bond funds.
Long-term open-end fund flows increased by more than 11% in August, and once again the lion's share went to fixed-income funds. Taxable-bond funds attracted $24.6 billion in new money for the month, and municipal-bond funds absorbed another $5.2 billion. Taxable-bond funds have now taken in $168.4 billion for the year to date. Alternative strategies also took in a robust $3.1 billion in August.
Intermediate-term bond funds dominated once again, taking in nearly $18.5 billion for the month. Diversification, though, remains a priority for investors, as multisector bond and world bond funds came in second and third, with $3.0 billion and $2.7 billion, respectively, in flows. Emerging-markets bond funds remain popular, too, with $1.1 billion in inflows. Category assets have now reached $32 billion versus $15 billion 12 months ago.
On the other hand, even though the long-government and long-term bond categories have enjoyed strong returns, inflows remain modest. These two categories absorbed just $191 million and $157 million last month, respectively. That's despite the long-government category gaining 8.4% in August alone and 25.2% for the year to date.
Meanwhile, the relentless outflows continued for U.S. stock funds, as another $14.3 billion headed for the exits. This continues the renewed aversion to domestic-equity funds that began with May's flash crash. During the past four months alone, these funds have shed a combined $48.9 billion.
Large-growth and large-value funds are taking the brunt of investor discontent. These two categories surrendered nearly $9.1 billion in August alone and a combined $35.6 billion for the year to date. That latter figure represents nearly three fourths of all U.S. equity outflows. Curiously, large-blend funds have escaped relatively unscathed. They have lost just $309 million to outflows so far in 2010. This owes to the fact that the most popular index funds (that is, those that track the S&P 500 and total market indexes) call the large-blend category home. Conversely, index funds make up a far smaller proportion of assets in the large-growth and large-value categories. In keeping with continued investor preference for passively managed funds, this group welcomed $12.5 billion in August flows, which almost offset the nearly $12.6 billion that left their actively managed, large-blend counterparts.
After enduring mostly outflows since early 2009, money market funds took in $11.8 billion in August. This is on top of the $4.9 billion in inflows the previous month. Embedded within the monthly total are even stronger flows for taxable money market funds. That group collected more than $18.5 billion during the month, while tax-free funds saw $6.7 billion in outflows. As for this renewed interest in money market funds, this may be another residual effect of the greater risk-aversion stemming from May's flash crash; more on this topic follows below.
Keep Redemptions in Perspective
It has certainly been a rough couple of years for U.S. equity funds. Since the meltdown in 2008, money has continued to leave in droves. Nearly $40 billion has already walked out the door so far in 2010, after $25 billion left in 2009.
However, this doesn't add up to mass capitulation. To put things in perspective, even as the bear market's three-year anniversary approaches, domestic equity funds still account for more than $2.9 trillion in assets. The combined $68 billion in outflows since the end of 2008 is not even 2.4% of that total.