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Stock Strategist Industry Reports

Investors Continue to Put More Stock in Bonds

Well-diversified asset managers are attracting more inflows in the current environment.

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Convinced that we were still in a "risk-aversion" cycle at the beginning of the year--with investors likely to gradually increase their risk appetite during stable and expanding markets, only to pull back dramatically during market declines--I was surprised to see so much capital go into equities during the first few months of 2011, especially given all of the unrest in the Middle East and the slough of natural (and not so natural) disasters that impacted several major economies in the Asia-Pacific region. But during the last couple of months, things seem to have trended back toward the "risk-aversion" theme that we've observed since the market bottomed in March 2009, as concerns over the ongoing debt crisis in Europe, the struggling U.S. housing and employment markets, rising oil and gas prices, and the impending end of the Fed's second round of quantitative easing (dubbed QE2) all have weighed on the willingness to invest in equities. While the S&P 500 Index (SPX) is still up marginally year to date, the benchmark index has lost more than 5% of its value since the start of May, with investors signaling their displeasure by pulling back more dramatically on their commitment to both U.S. and international stock funds.

According to data provided by Morningstar Direct, investors pulled more than $4 billion out of U.S. stock funds during the month of May; based on our own estimates, investors are on pace to pull another $6 billion out this month. This compares rather unfavorably with the more than $26 billion that was diverted into these same funds during January and February of 2011. Inflows into international stock funds are also well off the pace set during the first quarter, with less than $2 billion flowing into these funds in May and what we estimate to be a return to net outflows this month. In the meantime, inflows into taxable bond funds have picked up some steam, looking to close out the first half of 2011 at more than $100 billion. Should this trend persist through the second half, we could see a third-straight year with investor inflows into taxable bond funds in excess of $200 billion. Also of note is the fact that the mass exodus from municipal bond funds that started in November seems to be winding down, with net flows being flat in May and likely to return to positive territory in June.

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