U.S. Equity Funds End Inflows Streak in March

This marked a sharp drop from February, when investors put net $46 billion in flows into long-term funds, according to Strategic Insight (SI), an Asset International company.

Aggregate equity mutual fund flows were a negative $2 billion in March; this was offset by net inflows of about $15 billion into bond funds. In total, long-term mutual funds experienced $96 billion of net inflows in 2012’s first quarter—a significant improvement over the previous quarter, which saw $23 billion in net outflows from long-term funds. It was also up from the $87 billion in net inflows in the first quarter of 2011.

In March, domestic equity funds ended their two-month streak of net inflows by posting net outflows of $7.5 billion. The net outflows occurred despite another month of positive stock market returns; the average U.S. equity fund gained 2% on an asset-weighted basis in March, and the S&P 500 Index generated a 12.6% total return in the first quarter of 2012 (the index’s best first quarter since 1998).

Meanwhile, international and global equity funds saw net inflows of just over $5 billion in March, led by flows into global allocation and diversified emerging markets stock funds.

“Investor confidence remains fragile, as evidenced by the swift downturn in U.S. equity fund flows after two months of modest inflows. The optimism on Wall Street has yet to reach Main Street,”  said Avi Nachmany, SI’s director of research. “There is no shortage of issues to worry about, including the economy, rising gasoline prices, and geopolitical tensions. So, we expect investors to continue to be cautious, and the near term may prove more favorable for bond funds than stock funds.” 

Taxable bond funds saw net inflows of $12 billion in March, as investors continued to use bond funds as income-producing alternatives to money market funds, CDs, and bank deposit accounts. Intermediate- and short-term bond funds led March’s flow. For the first quarter, taxable bond funds saw net inflows of $67 billion, far outpacing the $40.5 billion that went into taxable bond funds in 2011’s first quarter. Muni bond funds enjoyed net inflows of nearly $4 billion, as fears of widespread municipal defaults continued to fade.

Money-market funds saw net outflows of $69 billion in March, compared with net outflows of just $3 billion in February. Ultra-low yields continued to hamper demand for money market funds—a trend that resulted in net outflows of $116 billion in 2012’s first quarter,

Separately, SI said U.S. Exchange-Traded Funds (ETFs) enjoyed $10 billion in net inflows in March 2012. That brought total ETF net inflows to $53 billion for the first quarter of 2012—almost double the $27 billion in net inflows to ETFs in the first quarter of 2011, and a pace that could result in the sixth straight year of $100 billion or more in net inflows to U.S. ETFs.

March’s ETF flows were led by ETFs tracking the S&P 500, including $2.8 billion that went into the SPDR S&P 500 ETF. After those products, the most popular ETF categories in March were intermediate-term bond and diversified emerging markets equities, each of which drew about $1.4 billion in net inflows. “ETFs’ flexibility, including the ability to go long or short, has helped sustain net inflows across a variety of asset classes,” said Loren Fox, a senior research analyst at SI. “We expect continued, broad-based growth of ETFs.”

At the end of March 2012, U.S. ETF assets (including ETNs) stood at a record $1.21 trillion, up from $1.06 trillion at the end of December.