A Great Influx of New Money Into Funds

Investors are showing a lot more enthusiasm of late. In January 2013, we saw the greatest month of inflows on record. All told, we saw $115 billion in inflows to exchange-traded and open-end mutual funds. Open-end alone accounted for $87 billion, as all asset classes were well into positive flows.

You can read our complete report on January flows here.

Some called this the "great rotation," but it really looks more like a great influx. Investors aren't selling bond funds to buy stock funds. Far from it. Intermediate bond funds remain the most popular open-end category with $11 billion in inflows. U.S. equities remain toward the back of the long-term asset-class pack; however, they did receive $15.5 billion in inflows--their best month since February 2004.

- source: Morningstar Analysts

Although it is a sliver of the $115 billion in inflows, investors did pull $3 billion out of money market funds in January. They had received $77 billion in inflows in December. Only a fraction of that left, but clearly investors were directing all their new money elsewhere. With yields near zero, money market funds aren't going to have a lot of appeal except as a safe haven and a place to park money that you may need in the coming year.

- source: Morningstar Analysts

While the scale is unprecedented, we've seen U.S. equities garner flows in past Januaries, only to see enthusiasm wane. Worries about the fiscal cliff may have kept investors on the sidelines until the New Year's Day deal was struck, and it is possible that flows will trail off dramatically the way they have before.

I'd also caution against reading this as a bullish signal for U.S. equities. Mutual funds are just one slice of the players in the U.S. equity market, and historically flows have not signaled where the market was headed. In fact, 2000 was the biggest year for flows and that was the start of a brutal bear market. Conversely, 2003 and 2009 were big redemption years even though they were the beginning of multiyear rallies.