Even though credit worries in Europe dominated the headlines, investors took out their frustrations on U.S. stock funds.
By Sonya Morris, CFA | 06-14-10 | 10:00 AM | Email Article

The past couple of months have given investors plenty to worry about, and they responded by yanking cash out of mutual funds in May. Overall, long-term mutual funds registered outflows of $13.2 billion for the month entirely because of massive redemptions from equity funds.

Sonya Morris, CFA, is Associate Director of Fund Analysis at Morningstar.

While money market funds also saw outflows, the size of those outflows declined considerably, suggesting that some of the money exiting mutual funds sought safety in money market accounts. The $20.6 billion in money fund redemptions in May was roughly 20% of the average outflow experienced so far this year.

Even though credit worries in Europe dominated the headlines, investors took out their frustrations on U.S. stock funds. Almost $15 billion left the asset class in May for the largest monthly outflow since March 2009--the month that marked the beginning of the market recovery.

The European economic woes brought an end to a long streak for international stock funds. After 13 straight months of steady inflows, the asset class saw redemptions of almost $6 billion in May.

Bond funds maintained positive flows for the month, but enthusiasm for the asset class cooled considerably. Taxable bond funds took in just $4.8 billion. That dwarfs the results seen in recent months and is the smallest monthly inflow since August 2008.

Source: Morningstar Direct Fund Flow

Taking Risk off the Table
As volatility returned to the market in May, investors responded by ditching riskier investments in favor of more sedate ones. That manifested itself not only in the broad move from equities to bonds, but also in the flows within the fixed-income space.

While most bond categories saw positive flows in May, high-yield bond funds had to deal with massive redemptions. All but 34 of the 146 funds in the group registered outflows in May. By the end of the month, $6.3 billion had left the category, which is the largest monthly outflow since our records begin in 1998.

At the opposite end of the spectrum, short-term bond funds attracted $4.0 billion in new cash. That category has experienced strong and steady inflows since the beginning of 2009. That year, short-term bond funds took in a record $50.5 billion, and they appear to be on track to meet or exceed that record in 2010, with $23.1 billion in inflows through the first five months of the year.

Source: Morningstar Direct Fund Flow

Passive Fund Investors Show More Loyalty
Actively managed funds, which reported redemptions of $16.5 billion, were responsible for the outflows out of U.S. stock funds in May. Passively managed funds managed to maintain positive flows of $1.0 billion for the month. That's a continuation of a long-term trend. Actively managed stock funds have struggled to hold on to shareholders, but passive funds appear to have a more loyal investor base.

Source: Morningstar Direct Fund Flows

Vanguard and American Funds have been at opposite ends of that trend. Vanguard's share of the mutual fund market has increased from 14% at the beginning of 2008 to 15.5% today. Meanwhile, American Funds has seen its market share decline from 15% to just over 12% over the same period.

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Sonya Morris, CFA has a position in the following securities mentioned above: PTTRX Find out about Morningstar's editorial policies.
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