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By Christine Benz and Timothy Strauts | 08-12-2015 11:00 AM

U.S. Investors Still Favoring Foreign Fare

A lengthy bull market and fear of Fed tightening have investors feeling skittish about U.S. equities, says Morningstar's Tim Strauts.

Christine Benz: Hi, I'm Christine Benz for Morningstar. Investors continue to favor international-equity funds in 2015. Joining me to discuss the latest news in the world of fund flows is Tim Strauts--he is a senior markets research analyst with Morningstar.

Tim, thank you so much for being here.

Tim Strauts: Thanks for having me.

Benz: Tim, you and the team have been monitoring these fund flows into international-equity funds. We've seen them outperform U.S. so far in 2015, but this has actually been going on for a while where investors have been choosing foreign funds at the expense of U.S.

Strauts: The trend has been happening for about two and a half years now, and it's only accelerated over the last year. In the last year, a little over $210 billion has flowed into international funds. In the U.S. equity space, we've actually seen an outflow of a little over $10 billion in that same time period, so investors are clearly preferring international right now.

Benz: You think it has something to do with the fact that the investors in U.S. funds are anticipating Fed tightening and thinking that the economic cycle in Europe, in particular, could be more favorable for foreign-fund investors.

Strauts: I think we're kind of in a unique period here. Typically, fund flows follow performance, but that really hasn't happened here because U.S. equities have actually been a better performer than international. But what's happening, I think, is that investors are very skittish about the U.S. bull market. They have never really fully bought in to the performance. They feel that, in some cases, maybe the Fed is manipulating things with the ultralow interest rates. They really just haven't bought in. So, investors have been allocating over the last several years to international because potentially the valuations look a little more attractive.

Benz: When you look at the types of international-equity funds that are getting the flows, where is the money going?

Strauts: It's focused on the index funds right now. The largest-flowing fund is the Vanguard Total International Stock Fund (VGTSX). We have seen, in the past two and a half years, flows into emerging-markets ETFs being strong; that trend has actually switched recently. Now, most of the flows are going to developed international markets and away from emerging.

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