Fund Flows Turn Positive in June

After registering outflows in May, flows into U.S. mutual funds moved back into positive territory in June, with inflows of $13.5 billion for the month. Funds saw inflows in five out of the last six months, gathering a total of $166.7 billion in the first half of 2010, which is about 24% higher than total inflows this time last year.

After taking a bit of a breather in May, bond funds once again enjoyed substantial inflows in June. Investors added $17.6 billion to taxable bond funds in the month and $119.6 billion over the first two quarters of 2010. Meanwhile, muni bonds took in almost $2.0 billion for June and $19.5 billion for the year-to-date period.

Although the S&P 500 lost 6.6% year to date through June, conditions were even worse overseas, as the MSCI EAFE Index plunged 13% because of worries that the financial crisis in Greece would spread to greater Europe. Given the depth of the downturn in foreign stocks, it's surprising that U.S. fund investors continue to prefer international equity funds over domestic stock funds. Through June, foreign funds have gathered $19.6 billion in assets, while U.S. stock funds have experienced outflows of almost $17.0 billion.

Source: Morningstar Direct Fund Flow

Investors Shun the Top-Performing Category
The recent choppy markets have caused investors of all stripes to seek shelter in Treasury bonds. As a result, Morningstar's long-term government-bond category once again tops the performance charts, with gains of nearly 16% year to date through June.

Mutual fund investors don't appear to be joining the stampede, though. The category has registered outflows in four of the last six months, and redemptions total $279 million through June.

Source: Morningstar Direct Fund Flow

These funds have taken shareholders on a roller-coaster ride in recent years. Long-government bond funds rallied hard during the financial crisis, putting up gains of almost 28% in 2008, but they followed that up with a 17% drop in 2009. Those sorts of extremes have probably contributed to fund investors' lack of enthusiasm for the category, particularly during a time when the overarching mood is cautious.