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By Christine Benz and Michael Rawson, CFA | 02-13-2013 10:00 AM

Investors Come Back to Stock Funds

January asset flows revealed heavy buying activity of open-end equity funds for the first time in several years, but it's too soon to call it a trend, says Morningstar's Michael Rawson.

Christine Benz: Hi, I'm Christine Benz for After retreating from equity funds for the past several years, investors actually began buying them in January 2013. Joining me to provide some color on the latest asset-flows data is Michael Rawson. He is a fund analyst with Morningstar.

Mike, thank you so much for being here.

Michael Rawson: Thanks for having me, Christine.

Benz: So, let's discuss the headlines, Mike. Active equity funds and equity funds, in general, actually began to see positive flows in their early innings of this year. What's going on there?

Rawson: I think it's really a story of a rising tide lifting all boats. There were just tremendously strong flows across the board. So, we had $115 billion come in last month. That's the most money we have ever seen come into open-end mutual funds and ETFs in one single month. So, across the board, most asset classes attracted new flows.

Benz: So, there have been a lot of people waiting for this great rotation. We have seen very strong flows into bond funds for the past several years. You think it's probably too early to call the equity fund flows a trend.

Rawson: Yes, it's just one month of data, so investors need to be mindful of that. And I am not really sure who is calling it a great rotation. There is a lot of talk in the media about this great rotation. From what I have seen, there is two versions of this story.

One version has it that people are going to start selling bonds and rotate into U.S. stocks. And it seems like there was a little bit of evidence to support that in January.

Another version of the story has it that people are going to go from cash and very low-risk assets, such as government bonds, into riskier assets, and there is evidence to support that theory, as well. But we have to be mindful of the fact that January is a seasonally strong month. You have a lot of people with the start of a new year are making lump-sum contributions into IRAs or retirement accounts, and that really seemed to be a big driver of flows last month.

You also had companies accelerating dividend payments into the end of last year. There was talk that if capital gains or dividend tax rates increase next year, the companies wanted to prepay those dividends.

So, that may have brought forward some flows that we wouldn't normally have seen. A lot of money came into money market funds at the end of last year. Bank deposits ticked up a little bit. It seems that in January some of the money that would have normally gone into money market funds, or would have normally gone into the bank, came into the markets.

So, those are phenomena, kind of, that are seasonal that probably won't persist. So, I think it might be premature to call it a great rotation.

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