Strategic Insight Sees More Growth for Bond and Alternative Investments

Inflows to bond mutual funds totaled $138 billion. First-half 2010 inflows were led by taxable bond funds (net inflows of $120 billion). Many of those flows went to short- and intermediate-term corporate bond funds, as they drew investors fleeing near-zero yields in cash accounts (there is nearly $10 trillion still idling in cash in banks and money funds, SI said).   

“We expect continued sizeable inflows to bond funds, and not just as cash substitutes. More flexible bond funds appeal to investors in a defensive mood and their financial advisers, with such flexibility helpful to address some (but not all) of the concerns about rising interest rates in the coming years,” said Avi Nachmany, director of research at Strategic Insight, in a press release.  

International equity funds (1H net inflows of $34 billion) also saw healthy demand. Part of this growth was driven by emerging markets equity funds, which drew just over $10 billion in the first half – ahead of the $7 billion they drew in the first half of 2009. A limited appetite for risk restrained demand for U.S. equity funds in 1H 2010, resulting in net inflows of just $4 billion.  

Other strategies for which SI sees growth for the rest of 2010 include: 

• Global tactical asset allocation funds – which have less constrained mandates and allow their portfolio managers to invest in multiple asset classes around the world. The emerging category of global tactical asset allocation funds drew $13 billion in net new flows in 1H 2010, versus $2 billion in net inflows in 2009’s first half. SI expects further growth and more launches of these more-flexible funds. 
• “Alternative” mutual funds – those offering exposure to market-neutral strategies, long/short strategies, hard commodities, and other less-correlated asset classes. In the first half of 2010, alternative mutual funds (excluding ETFs) drew net inflows of $13 billion. Alternative mutual funds ended the first half with a record $116 billion in assets, up from $102 billion at the end of 2009. This growth results from more investors seeking “absolute returns” and downside protection in the wake of the financial crisis, as well as diversification of correlations to reduce volatility, according to SI.  
• Actively managed mutual funds. During the first half, over $1 trillion of actively managed stock and bond funds were purchased by investors (SI’s estimates were based on ICI reported gross purchases, not net flows); more than 80% of funds purchased by investors and advisers are actively managed, with the balance put into passive products. 

ETF Growth  

Strategic Insight announced that Exchange-Traded Funds (ETFs) took in $39 billion in net flows during the first half of 2010 - slightly ahead of the $35 billion in net inflows ETFs gathered in the first half of 2009.   

U.S. ETF assets (including ETNs) totaled $785 billion at the end of June, invested in a record 977 products.  

Net inflows to ETFs were led by gold ETFs, emerging markets ETFs, and short-term bond ETFs.