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By Christine Benz | 10-11-2011 02:12 PM

Investors Shrug Off Performance Woes in September

Flows to many hard-hit categories improved despite the shaky market, says Morningstar's Kevin McDevitt.

Christine Benz: Hi, I'm Christine Benz for Morningstar.

Despite a weak market environment, asset inflows into long-term mutual funds turned modestly positive in the month of September. Here to add some color on what investors have been buying and selling is Kevin McDevitt, he is editorial director for Morningstar.

Kevin, thank you so much for being here.

Kevin McDevitt: Thanks for having me, Christine.

Benz: So Kevin, one thing I want to talk about, something we've been examining, is the asset class of money market mutual funds. We've seen such an exodus of shareholder money from this category. I would like your take on what's going on there?

McDevitt: Sure. Well, you continue to have very strong outflows out of money market funds this year. Through September we've seen over $160 billion come out of money market funds. What's interesting about that, though, is most of that money is not flowing into long-term mutual funds. In September, you had about $14 billion come out of money market funds, but only about $3.8 billion went into long-term mutual funds, and what's striking about this is that in a year like 2009, when you also had very strong flows out of money market funds, in that case, though, you had pretty much all of that money flow into long-term mutual funds. But in this case, that money is leaving the system; it's not going to long-term mutual funds. It's coming out of money market funds, and it's going someplace else, possibly to banks, possibly to be used to pay off debt, possibly used for consumption, but the fact is, it's not going to long-term mutual fund.

Benz: You did a little poking around, though, Kevin, and at least based on FDIC data, it doesn't appear that it's necessarily flowing into bank accounts or money market accounts run by banks?

McDevitt: Right, that's been another surprise. Again, as you mentioned, you saw very strong increases in bank deposits in both 2009 and in 2010, and that's despite the fact that the Fed had cut rates to zero, and savers weren't get anything, as they aren't today, weren't really getting anything on those accounts. What's changed so far in 2011, and we don't have full data through the third quarter of this year, but what seems to have changed is that, that growth in deposits has really slowed substantially so far in 2011.

Benz: So let's shift gears, Kevin, and talk about some of the long-term asset classes. It's obviously been a very volatile and scary market recently. Are investors demonstrating a preference for safety when it comes to their bond and stock funds?

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