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By Christine Benz and Kevin McDevitt, CFA | 08-09-2012 01:00 PM

Investors Haven't Left Equities for Dead

Equity funds have experienced outflows over the last five years, but the exodus is not as extreme as it's portrayed.

Christine Benz: I'm Christine Benz for Morningstar.com.

Some commentators have been writing about the death of equities among small investors, but Morningstar editorial director Kevin McDevitt thinks that's premature. He is joining me to discuss the latest trends in mutual funds' inflows and outflows.

Kevin, thank you so much for being here.

Kevin McDevitt: Thanks for having me, Christine.

Benz: Kevin, one thing that we've been hearing is that investors have given up on equities. The flash crash and all the volatility in stocks have left investors retreating from stocks. Let's talk about what you see when you look at the data--do you think that that's a true assertion?

McDevitt: I think there is some truth to it, but it's certainly overblown at least the way it's being portrayed in the media. There have been outflows over the last five years in particular, but really, if you look at the outflows as a percentage of assets, they are really not as extreme as it's portrayed at times.

And just to put some numbers around that, U.S. stock assets--if you are including both open-end funds and ETFs--peaked in October of 2007. That's right when the market peaked as well, and assets then were about $4 trillion.

Now, not quite five years later, assets are still just under $3.8 trillion, which is  roughly a 6% decline. So you have seen a drop in assets, but again, it hasn't been anything catastrophic, and it's even less if you look at just outflows. Over the last five years combined outflows have been about $121-$122 billion; that's just a 3.2% decline from the beginning asset level. So, yes, there have been outflows, and the absolute numbers are big, but on a percentage basis, it's really not as extreme as is being portrayed at times.

Benz: So it sounds like what you think people are missing is that maybe they are not adding back in these very strong flows we've seen into passively managed products, especially ETFs. When you put them back into the mix, it's actually not been all that bad for funds?

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