Bond, Stock Funds Reap $136B in 2Q09, Best Sales Since First Quarter of 2007

Investors showed strong confidence in long-term mutual funds in the second quarter, boosting sales in bond and stock funds by $136 billion, Strategic Insight reported. It was the strongest quarter for sales since the first quarter of 2007, when long-term mutual funds drew nearly $150 billion.

"Despite continued economic uncertainty, the mutual fund industry has enjoyed remarkable stability relative to other financial services sectors," noted Avi Nachmany, director of research at Strategic Insight. "Stock and bond funds are the core of the fund industry, and the robust inflows to both in the second quarter are a testament to the long-term perspective of most fund investors."

The biggest seller was bond funds, which drew net inflows of nearly $90 billion. Equity funds took in $47 billion, with one-third of that money going into international stock funds.

Noting that investor confidence has been slowly rising since the market hit bottom on March 9, Strategic Insight Senior Research Analyst Loren Fox added, "Including June, equity funds have now enjoyed three straight months of solid inflows. Investors are tiptoeing back into riskier asset classes, and while the recent stock market retreat slowed equity fund inflows, they would rebound if the second half of 2009 experienced an economic recovery."

39% of Managers Expect Earnings Boost by Sept.

More investment managers expect corporate earnings to increase in the next three months, and a majority expect global gross domestic product growth to accelerate in the next six months, according to a survey of 70 institutional managers by Northern Trust Global Advisors.

The quarterly poll said 39% of participants think corporate earnings will increase in the next three months, compared with just 1% a quarter earlier. Fifty-eight percent of managers expect global inflation to increase in the next six months, compared with only 17% in the first quarter.

The survey reported a decline in managers who believe the market, as represented by the Standard & Poor's 500, to be undervalued. Only 51% viewed the index as undervalued, compared with 80% in the first quarter.

One-Third of Managers Moving Back Into Equities

After 56% of fund managers cut their equity exposure in the first five months of the year, in June, 32% said they would increase their equity investments, and 14% said they would hold them steady, according to a survey by the U.K.'s Association of Investment Companies.

"Given that the credit cycle is now entering an expansionary phase, we see clear opportunities in financial stocks going forward and have, therefore, allocated more into these financial stocks in recent months," said Shaun Miskell, an analyst with Blue Planet Investment Advisers.

Retirees Worried About Finances Doubles to 49%

A full 49% of retirees are insecure about their financial future, up from only 20% who were afraid a year ago, a survey conducted by LIMRA, the Society of Actuaries and the International Foundation for Retirement Education found.

Sixty-one percent are working with a financial adviser, up from 56% in 2008.

The survey was conducted among retirees between the ages of 56 and 77 with $100,000 or more in investable household assets.

Forty-three percent said their risk tolerance has decreased from a year ago. Among this group, 79% said they were concerned about the economy, 45% feared rising inflation, 39% said they don't have an adequate time horizon to recoup losses, and 28% reported that the decline in their home's value is upsetting.

"Retirees are definitely feeling the effects of the 2008 financial crisis, and have begun changing their behavior," said Sally A. Bryck, associate research director at LIMRA. "While seven in 10 respondents said they can still cover their basis expenses and afford a few extras, the number who said they spend money on whatever they wanted dropped sharply from 38% to 22%."

64% of Investors Focus on Debt, 15% on Retirement

Sixty-four percent of the calls going to Financial Finesse, which provides financial counseling to employees, are about debt reduction and budgeting, whereas only 15% of the calls are about investing and retirement planning.

"In their concerns about reducing debts and cutting expenses, employees are ignoring retirement planning," according to a report by Financial Finesse. "The credit crisis was the first financial crisis to hit us. The retirement crisis will be the next. We believe it will be both more significant and more prolonged than the current economic crisis."

With 11% of companies either reducing or eliminating their 401(k) matches, balances down 20% or more, employees either reducing or halting their contributions, and hardship withdrawals on the rise-Americans are heading for a paltry retirement.

Reducing debt is obviously very important, but people may be overreacting to the financial crisis and ignoring their inevitable needs in retirement, said Liz Davidson, chief financial officer of Financial Finesse.

"People are behind because of the downturn, and they might be compounding the problem by investing too conservatively or taking money from their retirement plans in the form of a hardship withdrawal or a loan," Davidson said. "It's kind of a one-two punch. The first punch came from the market and the economy. The second, people are effectively doing to themselves."

Independent Research Falls Sharply in Downturn

Mutual funds and other institutional money managers are using seven percent less independent research than last year, Greenwich Associates found. Providers of independent research reported that institutional managers are paying 11% of commissions this year, down from 18% in 2008.

Of course, following the 2003 settlement with then-Attorney General Eliot Spitzer over the conflicts of interest of investment banks providing research on the stocks they underwrote, the brokerage firms agreed to spend hundreds of millions of dollars on independent research for the next five years, and that ended last year.

But strains on profits due to the market's downturn are making it difficult for institutional managers to pay for independent research-at a time when they could use it most.

401(k) Auto Enroll Most Beneficial for the Young

Automatic enrollment into 401(k) plans is having the greatest impact on younger, lower-income workers, Fidelity Investments said.

Among the plans Fidelity manages, 52% of the participants who were automatically enrolled are between the ages of 20 and 34, and only 13% were between the ages of 50 and 64. Thus, Fidelity said, the impact of auto enrollment on older participants is not as significant, as many are either already participating or elect to enroll on their own.

In addition, 56% of those automatically enrolled made less than $40,000, and only 10% made between $80,000 and $150,000 a year.

Although only 16% of the plan Fidelity manages has automatic enrollment, nearly half of all of the participants in the plans that Fidelity oversees is in a plan with automatic enrollment, as auto enroll is very common among the largest companies.

"Auto enrollment is doing exactly what it was intended to do," said Scott B. David, president of workplace investing at Fidelity. "It is driving many Americans who would have otherwise not saved-mostly the young and lower-paid employees-to begin saving early and consistently, which is critical to having a healthy income in retirement.

"There is no doubt that auto enrollment has helped many new hires, especially younger workers, get started on their way to saving," David added.

Advisers Rethinking Asset Allocation

Financial advisers have sworn by asset allocation and diversification for years, but in the face of the market's demise in 2008, some are rethinking that age-old wisdom, The Wall Street Journal reports.

As Raymond James Financial Adviser Carl Mahler put it, last year, "asset allocation did not work. Everything went into the abyss."

Dismissing those who say 2008 was an anomaly, PIMCO co-CIO Mohamed El-Erian, said he witnessed a "breakdown" of traditional relationships and movements between asset classes. Last year, practically all investment categories moved in tandem with the S&P 500 Index. The index itself lost 37% in 2008-and everything else went down with it: the MSCI index of Europe, Asia and Australia tumbled 45%, the MSCI emerging markets index lost 55%, REITS gave up 37%, high-yield bonds lost 26% and commodities fell 37%.

Thus, some money managers are now treating U.S., emerging markets and international stocks not as separate categories but as one and the same. They are also viewing commodities as more closely aligned to stocks than to inflation.

Some financial advisers are, therefore, cutting back clients' equity exposure and turning more heavily to cash, Treasuries and go-anywhere mutual funds with more flexible mandates, as well as mutual funds that short the market.


(c) 2009 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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