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By Jason Stipp and Michael Rawson, CFA | 09-11-2013 01:00 PM

Investors Still Exiting Bonds

August saw continued big bond-fund redemptions and a divergence of institutional and individual investor flows in emerging-markets funds.

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Jason Stipp: I'm Jason Stipp for Morningstar. Morningstar's August asset-flows data showed investors continuing to pull money from fixed-income funds and putting money into equity and other categories. But as usual, there's more to the story than that. Here to offer the details is Mike Rawson, a fund analyst with Morningstar.

Thanks for being here, Mike.

Michael Rawson: Pleasure to be here.

Stipp: Fixed income continued to lose assets. This is the continuation of a trend that we've seen since the spring.

Rawson: Yes. In May and June we saw interest rates spike, but interest rates have continued to tick up a bit even through as recently the end of August and are flirting with that 3% level on the 10-year Treasury bonds. We've seen strong outflows from fixed income, whether it'd be taxable bond or municipal bond, and that's continued all summer.

Stipp: Of course, before we saw this interest-rate spike, fixed income had gotten a lot of assets. They're nowhere near losing all the assets that they've gained over the last several years.

Rawson: Sure. People were talking about fixed income being in a bubble, with tremendous inflows in 2012. However, there has been a pretty sharp reversal. In fact, Bill Gross' total-return fund, PIMCO Total Return, was one of the largest accumulating funds in 2012. Well, he's lost all of that. [There has been a decline of] about $40 billion in assets since the end of May. About $26 billion of that is from outflows, $15 billion of that is from a negative return on the fund. It's really phenomenal that last year it was one of the biggest accumulating funds, and he's lost it all just within a matter of few months.

Stipp: Our data also show that international- and domestic-equity funds gained inflows and a lot of other categories did, as well. We had, except for bonds for the most part, a lot of inflows into other areas?

Rawson: Yes. Taxable bond and municipal bond, again, had strong outflows. This has been going on now for several months where we've had outflows from municipal bonds. I think not only because of the rise in interest rates, but still that Detroit story is hanging over municipal bonds. But the other category groups, such as you mentioned U.S. equity, international equity, alternatives, and commodities, those are seeing inflows. So investors are going to other places.

For example, one of the funds in the equity category that was leading in terms of the amount of fund flows was Vanguard Total Stock Market Index. That's one of my favorite funds just because it's so low-cost. You get exposure to the entire U.S. market, even down to micro-cap stocks for a really low expense ratio. That fund is gaining assets. So the money is going to other places [other than bonds].

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