Mutual Funds Stage a Comeback in 2009

The year 2009 proved to be a recovery year for the fund industry. After a brutal 2008 that saw shareholders dump their funds en masse, inflows predominated in 2009, with bond funds capturing the majority of new assets. Net inflows amounted to $377 billion for 2009, and bond funds accounted for $357 billion of that total. Investors appear to have taken a more risk-averse stance in 2009 after experiencing harrowing losses in 2008. In addition, with low interest rates on money market accounts and CDs, many investors may have shifted to bond funds to eke out a little extra yield. That move comes with its own risks, though. Bond-fund returns will come under pressure once rates eventually do rise. It will be interesting to see which shareholders stick around and which will run for the exits.

As bond funds raked in the cash, U.S. stock funds bled assets in 2009. They saw an additional $8 billion in outflows in December, taking the full-year total outflow to $26 billion. U.S. stock funds have experienced outflows for the last three calendar years.

International-stock funds fared better in 2009, taking in $25.5 billion in flows. However, they have not come close to making up for the $70.4 billion in outflows they experienced in 2008. Flows into international funds have been helped by the hot performance of emerging-markets stocks. Three of the top five international categories--diversified emerging markets, Pacific/Asia ex-Japan stock, and Latin America stock--are dominated by stocks from developing markets.

Firms at the Wrong End of the Trend
Although 2009 was largely a year of inflows for mutual funds, some fund families didn't join the party.

As we've reported in past commentaries, American Funds lost assets throughout much of 2009, with total outflows of $25.5 billion. Six American Funds offerings topped the list of the funds with the biggest outflows:  Capital Income Builder  (CAIBX),  Washington Mutual  (AWSHX),  Investment Company of America  (AIVSX),  Income Fund of America  (AMECX),  Capital World Growth & Income  (CWGIX), and American Balanced  (ABALX).

Legg Mason/Western Asset also bled assets in 2009.  Western Asset Core Plus Bond (WACPX) and  Western Asset Core Bond (WATFX) disappointed investors with meaningful losses in 2008. In response, management has shorn up its risk controls. Yet, investors don't appear to be assuaged, as outflows continued throughout 2009 for both funds.  Legg Mason Capital Value (LGVAX) also added to the firm's woes. That fund has experienced net outflows in every month since September 2006, the year that manager Bill Miller's famous streak of beating the S&P 500 ended.

Putnam's net flows finished the year in negative territory, but outflows slowed as the year progressed. Although the firm's new absolute return funds have gotten off to a strong start, inflows into those funds weren't enough to offset steady outflows in many of the firm's equity funds, most notably  Putnam for Growth & Income  and  Putnam International Equity  (POVSX). The former fund got a new manager late in 2008, and he's off to a good start; but that hasn't been enough to bring investors back into the fold. Putnam International Equity lost assets even as other international funds captured inflows. That fund's returns have fallen well short of the competition for several years running, and that's kept it in annual net outflows since 2002.

Oppenheimer also experienced net outflows in 2009. The firm's taxable bond funds continued to lose ground, even as bond funds elsewhere were flooded with new assets. The blowup of the now defunct  Oppenheimer Champion Income  and big losses from its once popular  Oppenheimer Core Bond (OPIGX) grabbed headlines in 2008, and it apparently continues to cast a cloud over the firm's bond lineup. Oppenheimer's equity funds also saw outflows. For example, the  Oppenheimer Global (OPPAX) fund experienced steady outflows in spite of a solid showing for the year.  Oppenheimer Main Street (MSIGX) and  Oppenheimer Main Street Small Cap (OPMSX) also saw outflows even after the May arrival of a talented and proven new management team, led by Mani Govil.

Van Kampen and Morgan Stanley funds also saw outflows in 2009. In October 2009, Morgan Stanley announced that it would sell some of its retail funds, including the Van Kampen family, to Invesco. The uncertainly surrounding the acquisition likely contributed to the lack of positive flows. Interestingly, the Morgan Stanley funds that experienced the largest inflows were those run by managers that are staying at Morgan Stanley and include  Morgan Stanley Institutional Equity  and  Morgan Stanley Institutional Mid Cap Growth  (MPEGX), which took in $278 million and $279 million, respectively.

Are Stock Investors Losing Faith in Active Managers
Investors largely preferred active strategies in 2009. Active funds gathered $304.2 billion in assets for the year, while passive long-term funds took in $69.7 billion. However, investors pulled $52.9 billion out of active U.S. stock funds, while passive domestic-equity funds saw inflows of $26.2 billion.  Vanguard Total Stock Market Index (VTSMX) and  Vanguard Institutional Index (VINIX) accounted for $10.7 billion and $5.4 billion of those inflows, respectively.

Active strategies still represent the lion's share of the market, but they've gradually been losing ground to passive funds. Actively managed funds hold more than 87% of the total net assets in U.S. open-end mutual funds; however, that's down from 90% at the start of the decade, and that doesn't consider the impact of assets migrating to exchange-traded funds, which have grown substantially during the last 10 years.