Fund Flows Turn Positive in June

After registering outflows in May, flows into U.S. mutual funds moved back into positive territory in June, with inflows of $13.5 billion for the month. Funds saw inflows in five out of the last six months, gathering a total of $166.7 billion in the first half of 2010, which is about 24% higher than total inflows this time last year.

After taking a bit of a breather in May, bond funds once again enjoyed substantial inflows in June. Investors added $17.6 billion to taxable bond funds in the month and $119.6 billion over the first two quarters of 2010. Meanwhile, muni bonds took in almost $2.0 billion for June and $19.5 billion for the year-to-date period.

Although the S&P 500 lost 6.6% year to date through June, conditions were even worse overseas, as the MSCI EAFE Index plunged 13% because of worries that the financial crisis in Greece would spread to greater Europe. Given the depth of the downturn in foreign stocks, it's surprising that U.S. fund investors continue to prefer international equity funds over domestic stock funds. Through June, foreign funds have gathered $19.6 billion in assets, while U.S. stock funds have experienced outflows of almost $17.0 billion.

Investors Shun the Top-Performing Category
The recent choppy markets have caused investors of all stripes to seek shelter in Treasury bonds. As a result, Morningstar's long-term government-bond category once again tops the performance charts, with gains of nearly 16% year to date through June.

Mutual fund investors don't appear to be joining the stampede, though. The category has registered outflows in four of the last six months, and redemptions total $279 million through June.

These funds have taken shareholders on a roller-coaster ride in recent years. Long-government bond funds rallied hard during the financial crisis, putting up gains of almost 28% in 2008, but they followed that up with a 17% drop in 2009. Those sorts of extremes have probably contributed to fund investors' lack of enthusiasm for the category, particularly during a time when the overarching mood is cautious.

Meanwhile, short-term bond funds have taken in $27.3 billion in the first half of 2010. Plus, bank loan funds have seen record inflows of almost $6.6 billion over the last six months. That suggests that fear of rising rates has trumped performance-chasing so far this year.

Seeking Alternative Answers
Asset classes tend to correlate during periods of market stress, as we all learned in real-time in 2008. That gut-wrenching experience caused some to question the effectiveness of traditional diversifiers. Asset management firms preyed on those fears by launching a slew of alternative funds, which aim to be less correlated with traditional asset classes. For example, 64 bear-market ETFs and 47 long-short mutual funds have launched since the beginning of 2008.

Investors have clamored to jump onboard. In total, alternative mutual funds and ETFs took in a record $38.7 billion in 2009, and flows have continued strong so far in 2010 with year-to-date inflows of $15.4 billion. About half of these inflows have gone into long-short mutual funds, and bear-market ETFs claimed about another third of those flows.

Among traditional mutual funds,  PIMCO Fundamental Advantage Total Return (PFATX) has been a big winner in this arena, taking in almost $3.3 billion over the past 12 months. The next closest competitor is the  Merger Fund (MERFX), which has gathered $1.5 billion over the past year. Next are the  Absolute Strategies Fund (ASFIX) and  JPMorgan Research Market Neutral   with inflows of $1.4 billion and $1.1 billion, respectively.

While there's some fundamental rationale for including these diversifiers in a portfolio, investors may have been fighting the last war by clamoring to these funds over the past 18 months. Since the beginning of 2009 through June 2010, long-short funds have returned an annualized 3.3%, making them one of the worst-performing categories over that period. And even in 2010's choppy markets, the category has lost 3.2% year to date, underperforming most bond categories and other diversifiers like REITs.

Institutions Exit Money Markets
Although outflows have slowed slightly, money market funds have seen significant redemptions in 2010 and over the past 12 months. In total, $790.5 billion have exited money funds over the past year through June.

Almost 80%, or $616.9 billion, of those outflows have come from institutional share classes, which make up 65% of money market assets, so they will always have a significant impact on the asset class. However, institutional outflows are disproportionately large when viewed in relation to total assets.

Institutional redemptions over the past 12 months represent 26.5% of the total net assets at the beginning of the period, compared with 15.8% for all retail share classes. Granted, institutional flows aren't purely institutional in that they also include a slice of retail investors in 401(k) accounts, but these data still suggest that institutions have been putting their assets to work at a quicker pace than retail investors.

Open-end Fund Family Highlights
American Funds continues to lose ground, with redemptions of $5.8 billion in June for its worst month since March 2009. The family has seen outflows in each of the last 12 months for a total of $30.4 billion, which represent about 4% of its total net assets at the beginning of the period.

Source: Morningstar Direct Fund Flows

Eaton Vance Global Macro Absolute Return  (EAGMX) was the third most popular fund in June, behind  PIMCO Total Return (PTTRX) and  Vanguard Total Stock Market (VTSMX). The fund has seen its inflows increase in every month since the beginning of 2009, but June 2010's inflows of $1.1 billion were its biggest month ever by far. In the first half of 2010, the fund has registered inflows of almost $4.0 billion. It's by far the most popular fund in Eaton Vance's lineup and accounted for around two thirds of the firm's total inflows so far this year.

Investors' aversion to growth funds has been hard on Marsico Capital Management.  Columbia Marsico Growth  has been one of the most redeemed large-growth funds with $710 million in outflows in 2010, and  Columbia Marsico 21st Century  has shed $538 million in assets.

AllianceBernstein has registered net redemptions in 22 of the last 24 months. So far in 2010, fund redemptions have totaled $1.5 billion. Its international funds in particular have been shedding assets, most notably AllianceBernstein International Value (ABIAX) with $666 million in outflows. The fund's returns so far in 2010 land near the bottom of the foreign large-value category, as it did in 2008, and that's clearly tested the faith of some shareholders.

Artio Global had $832 million in outflows in June for its worst month ever. The firm is down over $1 billion so far in 2010, which is almost 5% of its assets under management at the beginning of the period. The institutional share class of  Artio International Equity II (JETIX) saw redemptions of $437 million during the month, and the fund has seen year-to-date outflows of $634 million. Investors have also pulled over $1 billion out of  Artio International Equity (BJBIX) so far this year. Performance can't be entirely to blame as the former fund has kept up with the category competition so far in 2010 and has outperformed since its 2005 inception. The older fund has struggled a bit lately, but it has a stellar long-term track record. The funds' managers, Rudolph-Riad Younes and Richard Pell, were named Morningstar's International Fund Managers of the Year in 2002.