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By Christine Benz | 02-13-2012 01:00 PM

A 'January Effect' for Bond Fund Flows

Strong 2011 returns and perceived safety led to continued popularity for bond funds last month, while domestic growth funds suffered redemptions.

Christine Benz: Hi, I'm Christine Benz for Morningstar. January was a great month in the equity market, but investors weren't buying stock funds. Joining me today to discuss the latest trends in mutual fund inflows and outflows is Kevin McDevitt. He is editorial director with Morningstar.

Kevin, thank you so much for being here.

Kevin McDevitt: Thanks for having me, Christine.

Benz: Kevin you mentioned in your report that January was sort of a "January effect month," but not for stocks. What were the big beneficiaries in terms of fund flows during the month?

McDevitt: It was really bond funds across the board, especially taxable bond funds had more than $24 billion in inflows last month, which was really one of the best months for taxable bond funds over the last three years. Certainly from the last 12 months that's one of the better showings.

And also you continue to see this resurgence, this revival of popularity with municipal bond funds. You had inflows there of more than $6 billion, which is the best showing for municipal bond funds since, I believe, about 2010. So ... you've seen a very strong revived interest in bond funds across the board.

Then secondarily, you also saw a return of flows to some balanced funds, world allocation funds, and conservative allocation funds, in particular.

Benz: So back to taxable bond funds, those were the biggest asset gatherers. If you drill in, which categories saw the most asset inflows during the month?

McDevitt: Intermediate-term bond funds were the big winners, which has been somewhat of a trend lately. The category had over $11 billion in inflows last month, and that continues, again, a trend of strong inflows into that category. That tends to be the core bond category for a lot of investors. So in some ways, it was not necessarily surprising that that category would lead the way.

You also saw very strong inflows into high-yield bond funds, too. You had over $6 billion go into that category. And that's been ... a more volatile category in terms of flows. You had tremendous outflows only about four or five months ago out of that category. But the last few months, you have seen stronger flows into high-yield bond funds.

Benz: I would like to get your take, Kevin, on what you think is driving these flows. It's obviously not yields, which have been shrinking ever lower seemingly month by month. What do you think investors are attracted to? Is it as simple as the fact that returns for bond funds were better than equity fund returns in 2011?

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