Signs of an economic slowdown have triggered the year’s first significant outflows from stock mutual funds, while bond mutual funds are seeing higher sales, according to Morningstar’s Direct Fund Flows for June.
Stock mutual fund assets fell $4.5 billion in May as investors responded to a “slow-moving correction that ate into gains,” said Kevin McDevitt, a CFA and editorial director for Morningstar. International stock fund assets increased by $1.5 billion, while taxable bond funds enjoyed $20.8 billion in new flows, marking a fifth consecutive month of increased investment in the asset class.
“The bleeding has even stopped for municipal-bond funds, which had flat flows after six consecutive months of outflows,” said McDevitt.
The move away from U.S. stocks reflects shaky investor confidence in a post-crisis economy. Consumers grew more pessimistic in May, reporting growing concerns about business conditions, the job market and inflation, according to The Conference Board Consumer Confidence Index.
“U.S. stock funds may return to the pattern of steady outflows seen throughout most of 2010,” McDevitt said. Through the Recession monthly outflows of more than $10 billion were common. The asset class bounced back with $16.5 billion in inflows this January, but has trended down since. Funds specializing in large growth and value companies were the least popular in May, and accounted for $4.1 billion of equity mutual fund outflows.
Investors drawn to international stock funds preferred the diversified emerging markets category, which accounted for all inflows into the asset class in May, said McDevitt. In the last year, assets held in diversified emerging market funds have doubled to $216 billion, and accounted for nearly 75 percent of the $42 billion in total international stock fund inflows.
The strong economic growth of emerging markets has not led to superior equity returns. Through the end of May, Europe stock funds gained an average of 35.6 percent, while diversified emerging markets funds rose 28.6. Yet, investment in diversified emerging markets was $30.5 billion, while Europe stock funds lost about $8.2 billion.
Municipal bond fund flows were flat in May, ending six months of heavy selling that peaked at $13.2 billion in December. Flows into bank-loans and high-yield funds have declined since peaking at $5.5 billion in January, giving “early indications that investors infatuation with credit risk is fading,” McDevitt said.
Flows into U.S. exchange-traded funds, or ETFS, fell by 3 percent in May, but assets are at $1.11 trillion, the second highest level in history.