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By Christine Benz and Michael Rawson, CFA | 02-12-2014 10:00 AM

Risk-On Mode Continues Into New Year

Asset flows were strong across the board in January, with investors giving extra attention to their retirement plans as well as nontraditional bonds and foreign stocks.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. January has historically been a very strong month for mutual fund flows, and 2014 was no exception. Joining me to discuss the latest data on the topic is Michael Rawson. He's a fund analyst with Morningstar.

Mike, thank you so much for being here.

Michael Ross: Thanks for having me, Christine.

Benz: Mike, first let's discuss these cyclical factors that tend to encourage flows in the early part of the year. What's going on there? Why are investors doing their buying?

Michael Rawson: So, as you mentioned, January is a strong month for flows historically, and our data going back to 1993, January tends to be stronger than the rest of the year. April is the second strongest month. And if you look at January and April, those two months are, I think, tied into the Internal Revenue Service rules in terms of investing in your IRA or your 401(k); you can make lump-sum contributions into an IRA starting in January for the next year. Of course, April is the deadline.

Benz: For the previous year.

Rawson: Exactly, it's for the previous year. So, those are two months where people are motivated to invest.

You also have a lot of companies doing either 401(k) deposits or bonus payments coming through in January. January just historically has been a strong month, and maybe that ties into some behavior we see in the market. But certainly, last month we had strong flows, so again, it ties into this cyclical phenomenon.

Benz: And maybe stoked a little bit by very strong market performance in 2013?

Rawson: Absolutely.

Benz: Let's look at the categories. Really, across the board, you saw quite strong flows. Even into categories that were pretty unloved last year, like muni bonds.

Rawson: Yes, everything pretty much had inflows except for commodities. So, municipal bonds had, I think, their first inflow in about a year, which was surprising.

Benz: Not a big inflow.

Rawson: Not big, but it was positive. Equities, again, were very strong as they were in all of last year. U.S. equities did well, but the breadwinner was really international equities. People were investing internationally; there were very strong flows there.

Benz: And why do you think that is, because international-equity funds underperformed U.S.-equity funds last year?

Rawson: International didn't do as well as the U.S., but the U.S. just did spectacular; 33% return for the S&P 500. Developed international markets actually did OK. They didn't do as well as the U.S., but if you were in a developed international fund, you probably are happy with your performance. And because of the European financial crisis which happened a little bit after U.S. financial crisis in 2009--the European financial crisis kind of dragged on--I think a lot of investors sat on the sidelines and avoided Europe. People were concerned about the euro itself. So, a lot of people stayed from Europe.

Now, the economies are improving there. The stock market performance is better. I think people are going back and kind of catching up where they hadn't been putting money into Europe before. Now they're catching up and putting that money back to work in Europe. And especially, Japan. Europe and Japan are kind of the two heavyweights in the developed space. Japan announced a lot of reforms and that's gotten a lot of people excited about what's going on there.

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