The Most Popular and Most Shunned Funds of 2010

Investors might have been hoping for more calm in the equity markets in 2010 after a steep decline in 2008 and early 2009, followed by a huge rally. But it's been yet another turbulent year for stocks so far. Equities dropped a bit early on, then staged a rally led by much of the same cyclical fare that soared in 2009 before staging a sharp reversal when the government-debt situation turned out to be more dire than feared. Because we're already nearing the first-half point in 2010 and the market averages have been all over the place, we decided to take a closer look at the funds investors have been flocking to and those they've been fleeing. (See my colleague Karen Dolan's piece on dollar-weighted returns and the costs of chasing performance.) We included bond funds, too--although bond markets generally haven't seen a repeat of the turbulence of 2008-09, bond funds' flows are clearly affected by investors' sentiments about stock funds.

The Top Five
 PIMCO Total Return (PTTAX)
2010 inflows: $18.6 billion (All figures are through the end of May.)

The overwhelming leader in net flows this year is a bond fund whose manager, Bill Gross, stated earlier this year that bonds have seen their best days. It's also worth noting that four of the five funds that have received the most money from investors are bond funds. Nevertheless, this fund's A shares have gained nearly 4% for the year to date through June 9, 2010 (slightly outpacing both the Barclays Capital U.S. Aggregate Bond Index and the intermediate-bond category norm), while stocks (as represented by the S&P 500 Index) are down 2%. Investors should keep their expectations for bond returns in check; this fund, for example, recently sported a modest yield of 3.88%. But even so, it's difficult to bet against Gross and his team.

 Templeton Global Bond (TPINX)
2010 inflows: $7.9 billion

Investors have rushed into this fund despite the fact that the troubled eurozone makes up a significant chunk of its benchmark. To his credit, manager Michael Hasenstab has greatly limited the fund's exposure to that area (as well as to U.S. Treasuries and Japanese government bonds) and focused more on emerging-markets debt. While that bet might appear to court risk, many developing countries (particularly within Asia) are in substantially better financial shape than their Western counterparts. Furthermore, Hasenstab has hedged some of the fund's emerging-markets' currency exposure to damp volatility (though, at one third of assets, it's still substantial). This approach has certainly paid off over the long haul. As for 2010, the fund has gained 4% through June 9, beating the vast majority of its international-bond peers.

 Vanguard Total Stock Market (VTSMX)
2010 inflows: $6.7 billion

This fund's flows appear to be related to the popularity of target-date funds; it's a very large holding in Vanguard's target-date offerings, especially the longer-dated, equity-heavy ones. (For example, Total Stock Market comprises 66% of the assets of  Vanguard Target Retirement 2030 (VTHRX).) The fund's long-term record is solidly above-average thanks to its rock-bottom costs, but it hasn't been shooting the lights out. It finished within a percentage point of the large-blend norm in both 2008 and 2009. And for the year to date, it's flat (though that puts it ahead of most of its category peers). The fact that its inflows are at the top of the equity-fund charts could also be a reflection of investors' dim opinion of stock-fund managers following the disastrous losses of the October 2007-March 2009 bear market.

 Vanguard Total Bond Market (VBMFX)
2010 inflows: $4.8 billion

This fund looked great in 2008, when investors fled the lowest-rated debt for the safety of Treasuries. While it lagged the vast majority of its intermediate bond peers in 2009's bounce-back rally (and has been average in 2010 with a 4% gain), it's quite possible that investors still see the fund as a relatively safe haven. (Also, like Total Stock Market, it's likely benefiting from inflows into Vanguard's target-date funds.) Given the fund's 32% stake in Treasuries (nearly triple the category norm) and mounting deficits in the U.S., it may not be a port in a storm. But its low costs in an area where absolute returns usually fall within a narrow range are a formidable long-term advantage.

PIMCO Unconstrained Bond (PUBAX)
2010 inflows: $4.7 billion

This fund's popularity can be ascribed to the power of the firm's brand name, as much as anything. It's just under two years old, and it's off to a good (but not great) start. But the fund has free rein to invest in any corner of the global bond market and tries to generate solid absolute returns without being tethered to a benchmark. Giving PIMCO's massive team of fixed-income experts, that kind of freedom makes the fund very appealing.

The Bottom Five
 Fidelity Equity-Income (FEQIX)
2010 outflows: $3.8 billion

A very poor showing in 2008's sharp decline--which was common among Fidelity's value funds--is apparently still pushing investors out of this fund. That's understandable; investors tend to think of equity-income funds as defensive offerings, so the fund's struggles during a severe down market are disappointing. It performed pretty well in last year's rebound, and its flat performance this year is relatively good, but its long-term record under veteran skipper Stephen Peterson is just average. This fund has very often been fairly dull rather than bad. Given Peterson's experience, the support he gets, and the fund's modest costs, it's not necessarily a fund to run away from.

 American Funds Washington Mutual (AWSHX)
2010 outflows: $2.3 billion

 American Funds Capital Income Builder (CAIBX)
2010 outflows: $2.3 billion

 American Funds Growth Fund of America (AGTHX)
2010 outflows: $2.3 billion

 American Funds Investment Company of America (AIVSX)
2010 outflows: $1.9 billion

Yes, four of the five funds with the biggest outflows in 2010 are American Funds. (The sixth and seventh funds on the list are also from that firm.) But nothing has gone terribly wrong with the firm. True, these funds have generally stumbled a bit over the past three years after posting very strong performance earlier in the decade. Furthermore, each of the four lands in the bottom third of its respective categories thus far in 2010. But the firm's massive, experienced investment team is still in place and the funds' generally prudent strategies haven't changed. These funds are likely showing up at bottom of flows lists primarily because they're huge--the smallest of the four recently weighed in at $46 billion--and they did so well in the previous bear market that investors' expectations for American had become a bit unrealistic. Also, the fact that these funds invest primarily or exclusively in equities and investors have been pulling money out of stock funds has likely hurt. We're still concerned about the sheer size of Growth Fund of America at $148 billion, but the funds otherwise remain solid core holdings.