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Stock Strategist Industry Reports

Fixed Income Continues to Dominate Investor Fund Flows

Interest in international equities picks up, while thirst for U.S. stock funds remains tepid.

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With the domestic equity markets up 9% during the first two months of 2012 and most international stock markets posting equally solid returns, we expect most of the asset managers we cover to see increases in their assets under management. However, investor capital continues to be directed primarily at fixed-income assets, with intermediate-term bond funds picking up the largest share of investor inflows. With passively managed U.S. and international stock funds capturing almost all of the money flowing into equity and fixed income continuing to be the asset class of choice for a risk-averse market, we believe the more broadly diversified asset managers, especially those with solid equity and fixed-income franchises, exchange-traded fund platforms, and the ability to offer exposure to international markets, will hold the strongest hand.

Investors Shun Actively Managed U.S. Stock Funds
Despite stronger domestic equity markets in January and February, with the S&P 500 Index up 9% on a total return basis through the end of last month, investors continued to shun actively managed U.S. stock funds, pulling out more than $10 billion during the first two months of 2012. The outflows from actively managed U.S. stock funds weren't as bad as in the third and fourth quarters of last year (when investors pulled out $49 billion and $46 billion, respectively), but still a far cry from the more than $15 billion that flowed into these funds during the first quarter of 2011. Meanwhile, flows into U.S. stock index funds and exchange-traded funds look to be on par with what we were seeing in the year-ago period, with $7 billion and $14 billion, respectively, flowing into these passive investment vehicles. Flows into international stock funds have also picked up pace so far in 2012, unencumbered by some of the events--like the Japanese earthquake/tsunami and the start of the Arab revolts--that derailed flows in the first quarter of last year. Overall, though, investors continue to favor passively managed investments when putting money to work in equities--a trend that has been in place for U.S. equities since 2005, and one that kicked in for international equities during 2008.

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