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By Jeremy Glaser and Timothy Strauts | 06-16-2015 11:00 AM

Rate Hike Talk Not Deterring Bond Investors

Inflows to core bond funds and outflows from U.S. stocks continued in May despite the specter of rising rates, says Morningstar’s Tim Strauts.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm joined today by Tim Strauts. He is the senior markets research analyst here at Morningstar. We're going to look at May's asset-flow data and see what trends have been emerging.

Tim, thanks for joining me today.

Tim Strauts: Thanks for having me.

Glaser: Let's start with U.S. equity: more outflows out of active funds. This has been going on for some time. Anything interesting going on behind the scenes there?

Strauts: It's just the general pattern we've seen for the last year and a half. There was a negative $12.8 billion out of active U.S. equity and a small inflow of $1 billion into passive U.S. equity. This is a trend we've been seeing over the last few months, and what we really think is happening here is that people are taking money out of U.S. equity and moving it to international-equity funds.

Glaser: So, international funds did a little bit better. Where are people putting those bets? Is it emerging markets? Is it in Europe? What's been popular there?

Strauts: The two largest categories were foreign large blend, with about $14 billion in new inflows, and then European stock. In European stock, it's all been focused on the ETF side of the currency-hedged products, which we've talked about in the past because of the falling euro and the rising dollar. A lot of investors want to hedge the currency risk in this environment.

Glaser: Are there any risks, though, to that currency hedging? Do you think people are getting a false sense of security with those products?

Strauts: I think a lot of people are currency hedging their international exposure now when it's a little bit late in the game. The U.S. dollar has already risen 25% versus a lot of these currencies. You want to hedge your currency before the dollar rises, not after. So, if you're hedging now, you may be setting yourself for a fall here. Today, I think an unhedged position is probably the better value.

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