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Bond Funds Make Out Big in 2009 Inflows

After a brutal 2008 in which shareholders dumped funds en masse, inflows predominated in 2009.

Sonya Morris, 01/21/2010

The fund industry had a recovery year  in 2009. After a brutal 2008 that saw shareholders dump their funds en masse, inflows predominated in 2009, with bond funds capturing the majority of new assets. Net inflows amounted to $377 billion for 2009, and bond funds accounted for $357 billion of that total. Investors appear to have taken a more risk-averse stance in 2009 after experiencing harrowing losses in 2008. In addition, with low interest rates on money market accounts and CDs, many investors may have shifted to bond funds to eke out a little extra yield. That move comes with its own risks, though. Bond-fund returns will come under pressure once rates eventually do rise. It will be interesting to see which shareholders stick around and which will run for the exits.

As bond funds raked in the cash, U.S. stock funds bled assets in 2009. They saw an additional $8 billion in outflows in December, taking the full-year total outflow to $26 billion. U.S. stock funds have experienced outflows for the last three calendar years.

International-stock funds fared better in 2009, taking in $25.5 billion in flows. However, they have not come close to making up for the $70.4 billion in outflows they experienced in 2008. Flows into international funds have been helped by the hot performance of emerging-markets stocks. Three of the top five international categories--diversified emerging markets, Pacific/Asia ex-Japan stock, and Latin America stock--are dominated by stocks from developing markets.

Firms at the Wrong End of the Trend
Although 2009 was largely a year of inflows for mutual funds, some fund families didn't join the party.

As we've reported in past commentaries, American Funds lost assets throughout much of 2009, with total outflows of $25.5 billion. Six American Funds offerings topped the list of the funds with the biggest outflows: Capital Income Builder CAIBX, Washington Mutual AWSHX, Investment Company of America AIVSX, Income Fund of America AMECX, Capital World Growth & Income CWGIX, and American Balanced ABALX.PAGEBREAK

Legg Mason/Western Asset also bled assets in 2009. Western Asset Core Plus Bond WACPX and Western Asset Core Bond WATFX disappointed investors with meaningful losses in 2008. In response, management has shorn up its risk controls. Yet, investors don't appear to be assuaged, as outflows continued throughout 2009 for both funds. Legg Mason Capital Value LGVAX also added to the firm's woes. That fund has experienced net outflows in every month since September 2006, the year that manager Bill Miller's famous streak of beating the S&P 500 ended.

Putnam's net flows finished the year in negative territory, but outflows slowed as the year progressed. Although the firm's new absolute return funds have gotten off to a strong start, inflows into those funds weren't enough to offset steady outflows in many of the firm's equity funds, most notably Putnam for Growth & Income PGRWX and Putnam International Equity POVSX. The former fund got a new manager late in 2008, and he's off to a good start; but that hasn't been enough to bring investors back into the fold. Putnam International Equity lost assets even as other international funds captured inflows. That fund's returns have fallen well short of the competition for several years running, and that's kept it in annual net outflows since 2002.

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