Fund investors continue choosing bonds over stocks

By Mark Jewell

AP Personal Finance Writer

BOSTON (AP) -- Mutual fund investors continued to put their money into bond investments rather than U.S. stocks last month, despite the market's recent gains.

But that distaste for stocks stayed at home, as U.S. investors added money to overseas stock funds.

Bond funds attracted more than $22 billion in net cash flow during October, while a net of nearly $2.6 billion flowed out of U.S. stock funds, the research firm Strategic Insight said recently.

Yet that $2.6 billion was less than one-fifth of the $15 billion that exited U.S. stock funds in September.

One possible reason? Investors warmed up a bit after the Standard & Poor's 500 index posted its best September since 1939, surging 9 percent. The gains continued last month, when the S&P 500 rose more than 3 percent.

Even then, last month investors extended a roughly three-year trend of pulling more cash out of U.S. stock funds than they've put in. Much of that money exiting stock funds has gone into bonds.

Flows turned positive for U.S. stock funds briefly in the spring. But outflows resumed when markets went through a volatile stretch in May and June amid signs of a faltering economic recovery.

"We are unlikely to see broad demand for equity funds until we see sustained job growth and other signs that the global economy, especially the U.S., is on surer footing," said Loren Fox, an analyst with New York-based Strategic Insight.

However, investors are still putting money overseas. Last month, a net $10 billion was put in funds investing primarily in foreign stocks. That's in line with an ongoing trend of a shift toward overseas stocks -- especially those in fast-growing emerging markets like China and India -- and out of U.S. stocks.

Strategic Insight says bond flows are on pace to exceed a net of $300 billion this year, trailing only the record $350 billion set last year.

Bond investors now face substantial long-term risk from an inevitable rise in short-term interest rates, currently near zero. When the Federal Reserve raises rates, prices for bonds with locked-in rates will drop. That's because investors will be able to buy newly issued bonds paying higher interest.

Last month, the net flow into taxable bond funds was $20.1 billion, with another $1.7 billion added to municipal bond funds.

Strategic Insight's findings were bolstered by Morningstar, another fund-tracking company. It also recently reported fund flows, including data for exchange-traded funds, mutual fund rivals that bundle together the investments that are in a particular market index. ETFs added a net of $13.1 billion in October. Since the beginning of the year, the net flow into U.S.-listed ETFs has been nearly $81 billion.

Published: Fri, Nov 19, 2010