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By Christine Benz | 04-13-2011 12:00 PM

Investors Still Yanking Cash From Stock Funds

Despite relatively good performance in the first quarter, investors took money out of domestic-equity funds in March.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Despite relatively good performance in the first quarter of this year, investors yanked money from stock funds in the first quarter of 2011.

Here to discuss the latest trends in fund flows is Kevin McDevitt. He is editorial director for Morningstar. Kevin, thanks so much for joining us.

Kevin McDevitt: Thanks for having me.

Benz: So, let's talk about this phenomenon with stock funds. You had relatively good performance, but overall investors did net pull money out of stock funds. What do you think is going on there?

McDevitt: Sure. Well, it's interesting. You saw actually quite strong flows in January and February of this year. Quite strong flows into U.S. stock funds in particular, which had been very unpopular for most of 2009 and 2010.

Benz: So, we thought maybe we were starting a trend, but it didn't persist.

McDevitt: Yeah, it really fell off in March, and it makes you wonder if a lot of what was happening in January and February was one-time rebalancing to some extent. It was end of year, and investors look at their statements and realized they didn't have as much equity exposure as they might want, so perhaps they were adding more to those stocks and to those funds.

Benz: But some categories of stock funds did get new assets, which were those, which appear to be popular?

McDevitt: Sure. Well, outside the U.S., you had foreign-stock funds generally doing well. You still have strong flows into emerging-markets funds, and you see much more just continuity in the international-stock space. There were strong flows into large-cap funds as well as small-cap funds too.

On the U.S. side, it's a different story. You, again, in March had flows out of large-cap funds, which is what we again saw in most of 2009 and 2010 as well, and you saw more flows into small-cap funds on the U.S. side. Again, this is in part driven by the fact that small-cap stocks have outperformed the large caps to such a great degree during the last decade, but even over the last year and even as relative valuations between large caps and small caps have gotten out of whack by some measures.

Benz: So, Kevin, you mentioned international, and it sounds like pretty broad-based flows into international despite what we saw happening in Japan and the Japan crisis?

McDevitt: Right, and just very anecdotally, it's interesting to see what happened even within the Japan stock category.

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