Retail Investors Still Risk Averse, Pull Money Out of Equity Mutual Funds

Sep 1, 2011 10:58 AM, By Diana Britton

Despite an opportunity to buy stocks on the cheap, retail investors still have a risk-averse bias, according to recent fund flows. Year-to-date through July, investors have yanked $17.8 billion from equity mutual funds, with outflows of about $31.6 billion in July and $22.9 billion in June, according to the Investment Company Institute. Meanwhile, about $95.4 billion has flowed into taxable bond mutual funds through July, including inflows of $12 billion in June and $9.8 billion in July, ICI said.

For the week ending Aug. 24, the trend continued, as investors redeemed $3.2 billion from stock funds and put $295 million into bond funds, according to ICI. Overall, investors withdrew $2.04 billion from long-term mutual funds last week.

One bright spot: dividend-oriented funds. Jeff Tjornehoj, head of research at Lipper, said equity income mutual funds are drawing investors now because these funds provide a level of safety through dividends. “Income helps pad returns,” he said. Year-to-date through Aug. 24, these funds have drawn $12.5 billion, according to Lipper. Tjornehoj said that investors who are putting money to work want to make sure they’re doing it with some margin of safety.

However, investors have been looking for some riskier equities in emerging markets. Emerging markets mutual funds took in $12.3 billion in assets this year through Aug. 24, according to Lipper. Loan participation bond funds, such as bank loan funds, have attracted $19 billion through Aug. 24, but these funds have turned a corner this month. In August, investors redeemed $4.8 billion from these funds, most likely due to concerns over the loan participation market, Tjornehoj said.

Municipal bond funds continue to struggle, with $24.2 billion in outflows this year, according to Lipper. While these funds took in some money in June and July, investors started to pull back again when the markets got shaky in August. During the week after S&P announced the U.S. downgrade, investors pulled $620 million out of these funds, Lipper said. A conservative or aggressive approach can work when playing the muni bond fund market, but advisors should know what they’re buying.

Exchanged traded funds have not fared as bad during the recent volatility, with ETF assets rising by $8.39 billion in July. Year-to-date through Aug. 24, large-cap core ETFs saw $2.9 billion in positive flows, versus $37 billion in negative flows for large-cap core mutual funds over that period, according to Lipper data. For the week ending Aug. 24, the SPDR S&P 500 ETF (SPY) drew in $2.5 billion in new cash.

Tjornehoj attributes the positive ETF flows to the vehicle’s popularity in choppy markets. Unlike ETFs, mutual funds don’t allow investors to get out in the middle of the day. ETFs, however, allow frequent traders to get in and out of the markets opportunistically. “ETFs are that tradable opportunity that mutual funds aren’t and shouldn’t be,” he said.

Historically, investors are drawn to ETFs during times of uncertainty, for their liquidity and transparency. Certain ETF strategies can also provide profitability in times of stagflation.

Tjornehoj said for some investors, now might be the time to get into the markets, depending on their risk profile. Equities could see their best run over the next few months, and now’s the time to buy on the cheap. “Investing toward discomfort” is often the smartest way to go, he said.

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