Equity funds continued to plow ahead in July, but both bonds and money market funds were hurting in the month, marking notorious firsts for both in recent history, according to data from New York-based Lipper.
Equity funds pulled in $21 billion during the month, following the $19.5 billion added in June. This month's inflows were among the 10 best months in the last five years. It also marked the second-highest inflow amount for the month of July, behind only the $28 billion gathered in 1997. The $21 billion represented an impressive 0.71% of current assets in equity funds, rivaling the 0.76% achieved during April 2000.
The positive numbers also mark the fifth-straight month equity funds have experienced net inflows, with the first coming back in March of this year. Previously, the funds had experienced outflows every month since November. It is also the longest string of months equity funds have experienced inflows since an eight-month run between October 2001 and May 2002.
Don Cassidy, a senior analyst with Lipper, said that investors are coming back to equity funds at a "pretty strong pace" when June and July numbers are combined. "It's not exactly a rip-roaring market, though," he said.
However, investors are not blindly throwing their money into funds, according to Cassidy. More aggressive types of equity funds are showing inflows, but optimism still remains in check. "They're doing it in a fairly cautious way," he said of investors. "There's a little bit of a more aggressive flavor to what people are buying this month. They bought a little bit of sector funds, considerably more international funds, but they are not loading up on trillions of dollars in tech funds. So, they're not chasing after the gusto."
Flows into sector funds, which are generally viewed as aggressive choices by fairly confident investors, increased by about 20% to $900 million, according to Lipper.
But caution was displayed in three main areas, including real estate funds, science and technology funds and gold-oriented funds. Real estate took in $450 million, while science and technology grabbed $150 million, and gold took in $80 million.
Cassidy also said the cautious attitude has led to investors coming back into the investment pool, but not diving in. Whereas they might have had a toe in the water a few months ago, they are ankle-deep now - but not quite ready to go in up to their knees just yet. "There's still a healing process and a lot of bad memories," he said.
However, this recent string of positive numbers has not been tested yet. "We're still waiting to see how much staying power those flows have," Cassidy said. "The question that the industry is still waiting to see is when we don't have a good month in terms of stock flow trends, how will the investor react?"
Breaking Free From Bonds
While things are looking up for equity funds, the same cannot be said for bonds and money market funds, which both had a rough month of July. "Bonds had a nasty six weeks from the middle of June, and people have reacted to that pretty sharply," Cassidy said. Investors' love affair with bonds actually started to show signs of trouble starting back in April, but truly fell apart this month. "People did step away from the bond fund security blanket that they've held on to for a while now," he said.
Liquidation in bonds totaled an estimated $8.8 billion and marked the first outflow since December 2001, and the largest outflow since late 2000. Short and intermediate debt bonds had outflows of $2.3 billion in the month, while taxable high-yield funds, which have been popular recently, suffered outflows of $1.5 billion. "It appears that the lessons about asset allocation have been quickly forgotten with the first palpable drop in bond prices," said Cassidy.
July is normally a busy season for money market funds, but this summer the funds were really feeling the heat. Money market funds showed outflows of about $2 billion in July, the first time the product has dipped into negative territory since 1988.
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