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By Jeremy Glaser | 09-13-2011 05:12 PM

Some Surprises in August Fund Flows

Morningstar's Kevin McDevitt digs into a curious surge in taxable-bond fund outflows and a deceleration in U.S. equity outflows in August.

Jeremy Glaser: For Morningstar, I am Jeremy Glaser. I am here today with Kevin McDevitt; he is an editorial director at Morningstar. We're going to take a look at August Fund Flow data and see where investors are placing their bets or not placing their bets.

Kevin, thanks for talking with me today.

Kevin McDevitt: Thank you, Jeremy.

Glaser: So, just overall can you give us the big picture for what August fund flows looked like?

McDevitt: Sure. There was a huge surge in long-term outflows. Outflows almost doubled from what they were in the previous months. What was most surprising, though, is that the surge in outflows was not coming from U.S. stock funds; it was coming more from taxable bond funds.

Again, for perspective, overall long-term outflows are about $32 billion, last month about $17 billion. But last month U.S. stock outflows were about $22 billion; in August, it actually fell to about $15 billion. The real surge came from high-yield and bank-loan funds.

Glaser: So, let's go ahead and take a closer look at fixed income, then, because that seems like where most of the money was flowing out of. What do you think was causing investors to pull out of some of those instruments?

McDevitt: Some of it, I think, was just performance. You saw spreads widening in the high yield space and returns were down for the month. You saw both high-yield funds and bank-loan funds losing a little over 4%. So, I think that was part of it.

But I think also just, more generally, across the board and for most of 2011, you've seen a real reduction in risk. You've seen that in equities, but now you are seeing that more in bonds, too. Demand for high-yield funds and bank-loan funds has been declining really since December of last year, it's just that this month, it really fell off a cliff.

Glaser: You did mention that the risk is coming off the table, but we actually saw that deceleration [in outflows] when it comes to U.S. stock funds. With all the volatility that we saw in August, is that a surprising result to you?

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