Bond funds continue to capture the vast majority of the investment dollars in the third quarter.
The third quarter proved to be a big comeback month for inflows into U.S. open-end mutual funds. During the three-month period, investors contributed $144.7 billion to funds, taking the year-to-date total to $273.2 billion. Meanwhile, $188.2 billion exited U.S. money market funds.
Bond funds continued to capture the vast majority of the inflows in the third quarter. Meanwhile, flows into equity funds have been tepid in spite of the broad stock market recovery. Although the S&P 500 has gained more than 19% so far this year, investors have placed only a net $3.8 billion back into U.S. stock funds.
After the market's nose dive last year, many have sought safety in lower-volatility investments like bond funds. However, investors may be in for a shock when rates eventually rise, and they definitely shouldn't get used to the double-digit returns that many core bond funds have notched so far in 2009. We're not forecasting an imminent rate hike; however, when rates do eventually move, the most likely direction will be up and that will put pressure on bond prices and fixed-income fund returns.
American Funds Spring a Leak
The outflows for U.S. stock funds in September can largely be attributed to American Funds. Among the least popular U.S. equity funds in September were American Funds Washington Mutual
In total, investors pulled $1.8 billion out of American Funds in September, continuing a trend that has plagued the firm all year. For the year to date through September, the firm has registered outflows of $19.3 billion, while the other major firms had inflows.
Like most other firms, American Funds' bond offerings have experienced strong inflows. So far this year, its fixed income offerings have taken in $9.2 billion. But that hasn't been enough to offset the flood of dollars exiting the firm's equity and balanced fund offerings.
American Funds' business mix has worked against it this year. Its key rivals, Vanguard and Fidelity, have a more diversified menu of funds, while American Funds' mutual fund lineup is significantly skewed toward equities. Just over 11% of the firm's mutual fund assets are in bond funds (both taxable and municipal). Meanwhile, equity funds make up around two thirds of the firm's mutual fund assets, with the remaining going to balanced funds.
Granted, with $880 billion in total mutual fund assets, American remains the second-largest U.S. fund firm. But its market share has definitely been under pressure in 2009.