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Stock Strategist Industry Reports

Will Investors Flock to Equities in 2011?

Investor inflows continue to favor the more broadly diversified asset managers.

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With investors continuing to plough money into fixed-income funds at a record pace, and equity valuations starting to look fairly stretched after close to two years of market gains, we're left wondering what 2011 will hold for the asset managers. Over the last two years, the more broadly diversified asset managers have held the strongest hand, not only seeing a recovery in their equity assets under management, or AUM, as global stock markets rallied, but also picking up most of the fixed-income inflows coming from U.S. investors. While the more singularly focused equity-heavy asset managers have seen a dramatic increase in their total AUM, almost all of the improvement in their managed assets has come from market gains, as opposed to investor inflows. Meanwhile, firms with significant exposure to money market funds have seen a fairly dramatic reversal in their fortunes, as much of the capital that was parked in these funds during the bear market has found its way into higher-yielding, fixed-income products.

Given investors' ongoing appetite for risk aversion and capital preservation, we think most of these trends will continue this year. As such, we expect the more broadly diversified asset managers to continue to hold the strongest hand in 2011, with an added boost going to firms that can either provide access to exchange traded-funds, or ETFs, or have a fair amount of international business in their portfolio. With two significant regulatory issues still hanging over the industry, revolving around proposals to reform of 12(b)-1 fees and others aimed at preventing another "breaking of the buck" in money market funds, investors will need to tread even more carefully when putting money to work in the asset managers.

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