Fund Investors Return to Buy in January

Fund investors returned to the markets in a big way in January, according to estimates by Morningstar Market Intelligence. After pulling $40 billion in December, investors sunk $8.3 billion (net) back into mutual funds in January. The figure excludes ETFs, money markets, and funds of funds. ETFs added an additional $2 billion.

It could be that a strong December was a signal to get back in or that investors and their advisors bought after doing tax-loss selling in December.

Flows are rarely causes of market performance but are instead laggards, telling you where the market has been. That was true in January as investors followed a strong December by adding money, though equity markets still sold off.

Most dramatic was the swing in equity funds. Investors bought a net $5.9 billion of domestic equity funds following a huge $12 billion redemption in December. Foreign equity funds swung from an $18 billion net redemption to about $2 billion in net purchases.

The three best-selling categories were large blend, foreign large blend, and high yield, which registered net inflows of between $2 billion and $4 billion. A strong theme there was inflows into equity index funds, which continue to gain in popularity. Vanguard Institutional Index Fund VINIX, Vanguard Total Stock Market Fund VTSMX, and T. Rowe Price Equity Index 500 Fund PREIX were the top sellers.

Meantime, investors also returned to municipal bond funds--it was the first time since August that they registered net inflows. Likewise, alternative asset funds--a group that includes precious metals and long-short--swung from redemptions to a $1.4 billion net inflow.

Taxable bond funds and balanced funds continued to suffer redemptions in January, though the pace slowed a bit. Taxable bond funds shed about $3 billion compared with $3.8 billion in December. Balanced funds shed about $850 million compared with $4.5 billion in December net redemptions.

For high yield, it was the second month in a row of inflows following a long stretch of redemptions. Vanguard High Yield Corporate VWEHX and American Funds High Income AHITX were the biggest draws.