Investors Still Favor Bond Funds

On a year-to-date basis, inflows totaled $165.1 billion – well ahead of last year’s pace, when funds took in $51 billion in the first four months of the year. Money market funds continued to bleed assets, as investors pulled out $118.8 billion in April. Total outflows year-to-date for money markets come to $443 billion, which already surpasses the outflows for all of calendar year 2009, Morningstar noted.  

U.S. stock funds finally got some attention from investors, who poured $6.3 billion into the asset class in April – the largest inflow into U.S. equity funds since May 2009. Actively managed funds were the beneficiaries of $2.7 billion of that amount. Balanced funds also staged a respectable comeback, with inflows of $3.3 billion, its best monthly showing since February 2008.  

However, taxable bond funds retained their dominant position, registering a $22.1 billion inflow in April. Support waned for municipal bond funds, which had a rather lackluster month with inflows of $989 million – the poorest month for muni-bond funds since December 2008, when the asset class saw substantial outflows.  

Morningstar noted that REIT funds have been getting some attention from investors lately, motivated by performance. Real estate has gained almost 67% over the trailing 12 months ended April 30. The global real estate category has also notched impressive gains of almost 50% over that time span. Flows into the real estate category totaled $1.5 billion in assets – its best start since 2007, and quite a comeback from 2009, when the category took in just $199 million for the full year.  

Flows into global real estate funds haven’t been quite as robust, but the category has still raked in $517 million so far in 2010, more than offsetting the $137 million in outflows it saw in 2009.  

The small bank-loan category has also gained favor with investors in recent months. The category notched inflows of $2.1 billion in April for its best month ever by far. So far in 2010, $5.5 billion has flowed into the category – more than it gathered in all of 2009. Bank-loan funds have put up impressive returns, gaining almost 29% over the past 12 months through April.   

Although the disaster in the offshore rig in the Gulf of Mexico took a toll on oil stocks, those results haven’t yet impacted flows into energy funds, according to Morningstar. Flows were modestly positive in April, but it’s likely too soon for fund investors to react to the news. The broader natural resources category took in $405 million in April and $1.3 billion so far in 2010 – almost two times as much as they took in at this time last year.

Target-date Funds: Cycle Resistant?  

Target-date funds have continued to steadily gather assets in 2010, with year-to-date inflows of $20.5 billion through April, according to Morningstar Direct Fund Flows. That’s 57% higher than the flows at this time last year. In total, target-date funds have amassed $291 billion in total net assets. 

If they were a single Morningstar category, they would rank as the seventh largest, falling between the foreign large-blend and world-stock categories, Morningstar noted.  

Given their prominence in 401(k) platforms, target-date funds appear to be cycle resistant. The group saw inflows in 2008, in spite of disappointing performance and legislative scrutiny - helping them maintain fairly steady growth rates. Quarterly inflows as a percentage of beginning total net assets have generally ranged between 4% and 10% over the past three years.  

Target-date funds are contributing a meaningful percentage of total flows at many shops. Such funds accounted for over half of Fidelity's flows and almost 40% of T. Rowe Price's flows over the past 12 months, according to Morningstar data. They also accounted for more than a third of flows at Wells Fargo Funds, TIAA-CREF, ING, and Principal.  

To view the complete Morningstar report, visit http://www.global.morningstar.com/aprilflows10.