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Fund Spy

Bond Funds Continue to Dominate Flows

Most of the money drawn out last year exited equity funds, while the vast majority flowing back this year has gone to bond funds.

Investors continued to pour money back into U.S. open-end mutual funds in October, but a clear divide between stocks and bonds remains. For the year through October 2009, total long-term inflows reached $314 billion, far surpassing the $154 billion that investors pulled out in 2008. Yet most of the money that was drawn out last year exited equity funds and the vast majority of money flowing back in this year has gone to bond funds.

That money has come from somewhere. Yields close to zero and a roaring market rebound have driven investors out of money market funds. After reaching a high of $3.6 trillion in January 2009, outflows for the past nine months have brought the total down to $3.2 trillion.

October marked a subtle but important shift for equity flows. International equities continued to bring in assets as the year-to-date flows totaled over $15 billion. The group, which was bolstered by flows into world-allocation and diversified emerging-markets funds, gathered $5 billion in assets in the month. Improved performance is a likely catalyst. For 2009 through October, Morningstar's diversified emerging-markets category has been the top performer with an average gain of 69%.

Domestic-equity funds, however, are being met with a very different fate. U.S. equity funds saw outflows gain steam with $8.1 billion exiting the asset class in October. That marks the second month in a row that U.S. stock funds saw a drop in assets and the fourth month of outflows this year. As a result, U.S. equity year-to-date flows are back in the red. Large-growth and large-value funds showed the largest declines this month.

Estimated Net Flows $Mil

 Oct. 2009YTD 20092008U.S. Stock-8,120-4,434-96,434International Stock5,14616,139-70,213Balanced-216-6,214-25,905Taxable Bond35,637233,71727,100Municipal Bond6,24262,9447,335Alternative1,69411,9353,901Total40,382314,088-154,215

DFA Rakes It In

Dimensional Fund Advisors, which is well known for its passive investment strategies, has seen steady inflows this year, bringing in more than $5.8 billion through October 2009. Total net assets at DFA have risen to $96 billion compared with $74 billion in October of last year. Leading the charge for the firm are  One-Year Fixed-Income (DFIHX), Two-Year Global Fixed-Income (DFGFX), and  Emerging Markets Value (DFEVX). On the opposite end, the firm's bread-and-butter  U.S. Small Cap Value (DFSVX) fund has seen modest outflows nearly every month of 2009 as this year's total reached $178 million.

Among the largest five fund families, American Funds remains the only one to experience outflows year to date. Unlike other large fund firms that saw flows toward fixed-income funds compensate for outflows in equity funds, American Funds fixed-income funds have not had the same pull. In October, investors pulled nearly $2 billion out of the firm, bringing the estimated outflows for 2009 to $21 billion. In a trend visible across many fund families, the hardest-hit asset classes for American Funds were domestic-equity and balanced funds.

Fidelity experienced outflows for the first time since March 2009, primarily from its domestic-equity funds, which saw $1.8 billion in outflows. The fund family's hardest-hit funds for the month were  Fidelity Magellan (FMAGX),  Fidelity Equity Income (FEQIX), and  Fidelity Spartan 500 Index (FSMKX). Bond funds at Fidelity continued to attract assets as Fidelity Series Investment Grade Bond (FSIGX) brought in $526 million during October.

The top 10 funds bringing in assets remained the same for October, with  PIMCO Total Return  (PTTRX),  Vanguard Total Bond Market Index  (VBMFX), and  Vanguard Short-Term Investment-Grade  (VFSTX) topping the list.

Investors pulled $667 million out of Dodge & Cox in October, bringing year-to-date outflows up to $1.2 billion.  Stock (DODGX) and  Balanced (DODBX) are the only two funds in the firm's lineup to have year-to-date outflows thus far in 2009.

Columbia has seen flows into its fixed-income funds improve throughout the year, bringing its year-to-date fixed-income flows to $2.5 billion. Short Term Municipal Bond (NSMMX) and Short Term Bond (NSTRX) account for much of the inflows.

Few actively managed U.S. stock funds have enjoyed positive net flows year-to-date. Those keeping their heads well above water include  Eaton Vance Large Cap Value  (EHSTX) ($2.7 billion) and  MFS Value  (MEIAX) ($2.0 billion).

October 2009

Fund FamilyTotal Net Assets ($bil)Mkt Share %YTD Est. FlowsVanguard1,00215.4481,958American Funds86613.35-21,280Fidelity69210.6717,081PIMCO Funds3084.7566,145Franklin Templeton2684.1314,375T. Rowe Price2003.0811,469OppenheimerFunds1171.80-3,140Dodge & Cox1071.64-1,249John Hancock1031.584,829BlackRock991.528,036

Target-Date Flows Continue to Sputter
Flows into target maturity funds slowed for the year to date, as measured by flows as percentage of beginning AUM. The longest maturity categories experienced the greatest slowdown. In fact, contributions to funds in the 2021 to 2050+ range peaked in the first quarter of 2009 and have been flat ever since. Meanwhile, retirement income and the categories ranging from 2000 to 2020 have continued to enjoy increasing quarterly growth in flows, with retirement income leading the way. This slowing in flows is likely attributed to record unemployment and a latent investor response to some target-date fund stumbles in 2008. The October uptick in 2021-2025 flows was due to the merger of two large 401(k) plans.

David Falkof does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.