Income, safety and international. Those are the key words when it comes to describing the most popular mutual fund categories.
Of the 103 new funds have been launched this year through mid-April, the top categories include absolute return funds (7), global flexible portfolio funds (6), equity income funds (5), global equity income funds (4), emerging markets debt funds (4), flexible portfolio funds (4) and mixed-asset target 2050+ funds (4), according to Tom Roseen, head of research services at Lipper.
The list is very similar to last year's.
Absolute return funds are designed to provide a positive return in boom or bust, typically offering a stated percentage spread above Libor, said Roseen. They are a response to the market crash in 2008, and use long and short strategies, forward contracts, derivatives, and hedge-like strategies.
Another popular category is global flexible portfolio funds and flexible portfolio funds, which target investors looking for higher yields and better returns, said Roseen. These funds invest in equity, fixed income, commodities, real estate trusts and money market instruments.
Equity income funds have been attractive since under the Bush tax cuts in 2003 qualified dividend income was taxed at a reduced tax rate of 15% rather than the marginal tax rate. Under Obama, that rate has been raised to 20% for the highest earners, which still makes investments targeting yield and distribution from equity funds hot, he said.
Also popular are target date funds, which took in the largest amount of money last year of Lipper's four equity groups, which also include U.S. diversified, world equity and sector equity. The category has so far remained the top attractor of investors assets in 2013 in the conventional open-end fund universe, Roseen said.
Twelve target date funds were rolled out last year; four have been rolled out to date this year, according to Lipper.
"They're the 'set it and forget it' funds, and a response to the market crash in 2008, Roseen said. "People are scared and decided to go to a one-stop shop and find a good target date fund," he said.
Investors are still risk averse, and there are no clear-cut signs of a rotation out of fixed income into equities, said Michael Rawson, a fund analyst with Morningstar. In January fund flows were so strong that even actively managed stock funds had good flows, but since January those flows into equity funds have trickled back down, Rawson said.
However, beginning last fall and continuing into this year, investors looking for higher yields have been shifting out of ultra-safe bond funds and into what are traditionally viewed as riskier fixed income categories, such as high- yield bonds, bank loans and emerging market bonds, Rawson said.
In January, domestic equity funds pulled in $18.4 billion, while bond funds garnered $32.7 billion, according to figures from the Investment Company Institute. Domestic equity funds then had $1.4 billion in net outflows in February, in March they pulled in $2.5 billion, and through mid-April they have pulled in $300 million in assets, according to the ICI. Meanwhile, bond funds attracted $20.2 billion in February, $17.4 billion in March and $9.7 billion through mid April, according to the ICI.
Segments such as bank loans and high-yield bonds will do better when interest rates go up, but they don't provide the portfolio insurance of Treasury bonds when there's a stock market sell-off, Rawson said. It may be that investors are more optimistic about the economy and willing to take the chance of investing in more credit-sensitive areas like high-yield and bank loans, he said. Or "maybe investors aren't fully aware of the role of bonds in their portfolio, he said.
Meanwhile, the long-term trend of a shift to passively managed index-type products is continuing, Rawson said. This trend works to the benefit of ETFs rather than to mutual funds, most of which are actively managed, he said.
On the equity side, emerging markets are continuing to attract the biggest inflows, Rawson said. Over last several months investors have gained a little more acceptance of Europe and are more willing to go to invest in developed markets, "but really it's been a story of people increasing their exposure to emerging markets," he said.
Last year, Fidelity topped the list of fund sponsors launching new funds, with 30 new offerings, according to Lipper. American Funds, with 18, and ING Investments, with 16 followed. TD Wealth leads this year's list, with eight new funds, followed by Putnam and Snow Capital Management, each with six, according to Lipper.
TD Wealth, the Toronto-based subsidiary of Toronto-based TD Bank that targets high net worth clients in the U.S., is rolling out eight mutual funds that are managed by the bank's institutional asset management subsidiaries TD Asset Management and Epoch Investment Partners.
The funds include a global equities fund targeting low volatility; global equity income; U.S.equity income; large cap core; U.S. mid-duration bond; high-yield bond and short-term bond, according to Jeffrey Gans, VP of products for TD Wealth. The funds are designed to work together in an array of portfolios targeting specific client needs, Gans said. For instance, the firm will offer income portfolios and low volatility portfolios, as well as portfolios designed for client risk profiles ranging from conservative income to aggressive growth, Gans said.