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By Christine Benz and Timothy Strauts | 05-20-2015 03:00 PM

Investors Increasingly Turning to Overseas Investments

Asset flow data show another month of inflows for foreign-stock funds while U.S. active and even U.S. passive equity funds saw redemptions.

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

Investors continued to plow money into international equity and taxable bond funds in the month of April. Joining me to discuss Morningstar's latest fund flow data is Tim Strauts, a senior markets research analyst with Morningstar.

Tim, thank you so much for being here.

Tim Strauts: Thanks for having me.

Benz: Let's look at the big headline, which is that international equity continues to receive really good inflows, even though when investors look at international-equity fund performance, it probably hasn't been as good as what domestic-equity funds have enjoyed.

Strauts: There has been a general shift from U.S. equity funds to international over the last several months. International took in little over $40 billion in new flows, and the flows seem to be dominated into the foreign large-blend category, and then also into emerging markets.

Benz: One story we've been monitoring is this ongoing inflow into passively managed products, index funds. Did you see that when you look at the flows into international-equity and emerging-markets equity? Do investors continue to prefer index funds? What kinds of funds are they buying?

Strauts: Broadly in international, investors are still preferring index funds, but if you focus down into the emerging category, it's actually a 50-50 split just last month between passive and active emerging-markets funds. And over the last year, emerging-markets active funds have taken in more money, which is one of the few equity categories where active is actually getting larger flows than passive funds.

Benz: Can you conjecture about what investors might be responding to in terms of choosing actively managed products in emerging-markets equity?

Strauts: There is the idea that in emerging markets, there may be more opportunity for an active manager to provide value, because it's a much larger base of stocks to choose from.

And also there is concern that the two large ETFs in the space--VWO, the Vanguard Emerging Markets Fund, and EEM, the iShares Fund--both track the same index, which is dominated in global multinational companies that often are state owned, and they have a very large allocation to China. So if you buy VWO or EEM, you may not be getting the emerging growth, the big growth story that you're expecting. You are getting firms, in many cases, that look similar to some U.S. firms. So active managers may be avoiding some of these larger firms and looking for undiscovered pockets of opportunity.

Benz: Switching over to fixed income: Let's talk about what's going on with the taxable-bond category, where we have continued to see some pretty good inflows.

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