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By Christine Benz and Timothy Strauts | 04-15-2015 10:00 AM

Investors Go for International-Equity Funds

International-equity funds--particularly currency-hedged funds--were the biggest beneficiaries of new investor dollars in March, continuing a broader trend over the last several years.

Christine Benz: Hi, I'm Christine Benz for Morningstar. International-equity funds were the biggest beneficiaries of new investor dollars in the month of March. Joining me to discuss this and other news in the world of fund flows is Tim Strauts. He is a senior markets research analyst with Morningstar.

Tim, thank you so much for being here.

Tim Strauts: Thanks for having me.

Benz: So, these big flows into international-equity funds--this is really part of a trend that we've been seeing for some time, correct?

Strauts: Yes. Last month, there was $34 billion in flows; but since 2007, international equity has taken in a cumulative $700 billion in flows and U.S. equity has taken in zero. So, investors have clearly been moving to international funds over the last several years.

Benz: So, I'm sure there are a lot of factors driving this, but is rebalancing perhaps part of the reason or can you conjecture about the rationales for that?

Strauts: I think, in general, investors have been scared away from the U.S. equity market; mind you, this number is from 2007. Since then, U.S. stocks have actually done very well, which is kind of surprising. You'd think that investors would be performance-chasing U.S. stocks, but they are not. They seem to have been scared off from the experience of 2008, and they've been looking to other regions like emerging markets for growth, which actually haven't performed that well recently.

Benz: That's right. So, that's what I want to look into. In terms of international equities, it's a broad basket of funds. Let's talk about the types of products. When you look at where the flows are going, what are investors buying?

Strauts: Investors are buying the hedged equity funds, which are relatively new products. Traditionally, investors have bought international funds on an unhedged basis, meaning that you own the stocks, but then if the currency moves, the currency can either subtract or add to your performance. But since the moves in the euro, where the euro has fallen dramatically versus the dollar, a lot of investors have been piling into these hedged funds.

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