Investors have developed a serious aversion to U.S. equity mutual funds, which is upsetting the balance of fund flows, according to Morningstar.
So far this year, investors have yanked $14.6 billion from U.S. equity funds and poured $102 billion into taxable bond funds, Morningstar's data shows.
There is good reason for this, of course. While the S&P 500 Index has fallen -6.6% this year, U.S. equities dropped -16% in the four weeks ended August 19. And the average U.S. large-cap equity fund has declined -11% year-to-date. By comparison, long bond funds are up 17% so far this year, making them the best-performing fund category.
"It's been a flight to bonds and away from equities," said Morningstar Analyst Ryan Leggio.
"We've seen pressure on stocks due to macroeconomic concerns, so it's made it a challenge for any portfolio manager to gain ground," added Todd Rosenbluth, a mutual fund analyst with Standard & Poor's. "The ones that have done well have been in more defensive sectors, such as healthcare and utilities. Investors are looking for stability and income."
Tenacity Amid Volatility Rewards 401(k) Investors
In light of the recent market volatility, a new report from Fidelity Investments analyzing the performance of 401(k) balances between Oct. 1, 2008 and June 30, 2011 is quite telling-giving a testimonial to the value of sticking with the stock market even amid the worst declines.
Among those investors whose portfolios included equity funds and who made no changes during these turbulent 3-1/2 years, the average account balance rose a remarkable 50%. For those who dropped to zero percent equity and who then returned to at least some equity allocation, their account balances rose 25%.
As for those nervous investors who ran for the exits from equity funds? Their accounts rose a scant 2%.
The value of sticking with equities is perhaps best underlined by those who had equity exposure but stopped contributions. Even without those additional funds, their account balances increased 26% by June 30, 2011. "Our analysis reinforces that during extreme market swings, it's essential that investing for retirement requires a long-term view," said James M. MacDonald, president of workplace investing at Fidelity.
Hedge Funds Bailed Out of Equities During Crisis
Despite their reputation for taking advantage of upsets in the markets, hedge funds wisely ran for the exit from stocks between 2007 and 2009, according to a report by Ohio State University's Fisher College of Business Assistant Professor of Business Itzhak Ben-David.
The study found that hedge funds reduced their stock holdings about 10% in the second half of 2007, as the credit crisis began. Then, in the second half of 2008, the average fund scaled back its equity exposure by another 30%. By comparison, mutual funds scaled back their equity exposure dramatically less, about one-tenth of these pullbacks.
