Mutual Fund Site

One of the most surprising figures surrounding the mutual fund industry should not be much of a surprise at all. The fact that domestic equity funds continue to bleed should not be all that much of a surprise given that positive and attractive gains clocked in other asset classes and equity groups. According to Morningstar’s latest Mutual Fund Flows report, domestic equity funds saw outflows of just over $16.25 Billion in September alone.

Investors continue to favor bond funds, with almost $3.5 Billion given to High Yield Investment Funds. As an extremely short-term strategy, this might not be such a bad move; our top pick, the Janus High Yield Fund has returned 12.6% on a YTD basis and 3.57% for the past month. Respectable to say the least, but we believe this fund could be living on borrowed time from here to the middle of next year. Investors who fall asleep at the switch could end up pretty upset.

We also maintain that domestic equity funds offer a tremendous opportunity for the most part. This sentiment is echoed by billionaire investors more qualified than any of us, including Warren Buffett himself who was quoted at Bloomberg on October 12 as stating that equities are more attractive than bonds. He further went on to explain that investors are “making a mistake” in holding bonds. Even Bond Kind, Bill Gross, has taken a more conservative approach with his rockstar fund, the PIMCO Total Return Fund, reducing duration and increasing credit quality. Why? Because bonds pose big risks right now.

Someone who is “extremely bearish on everything” is Marc Faber, but he was quoted on October 12 by Bloomberg again as showing less bearishness toward equities. In other words, he sees every asset class losing money, but believes that equities will lose less than bonds. Not quite the support for domestic equities that we were looking for but it certainly drives home the point: pulling money out of domestic equity funds in favor of bonds is like signing up for bigger losses.

What strikes us as particularly interesting is that the S&P 500 had a decent month in September, returning a little less than 9% for the month. This single-month performance is very respectable. Of course, we hear little about such momentous gains — a corresponding loss to the S&P 500 would make headlines and you can practically read them as follows: “Near Double Digit Loss Hammers S&P in September.” If it sounds bad, it will make headlines.

Yes, the flight into bond funds alarms us and we hope that our readers who happen to feel the need to put money into bond funds right now can let us know what they are thinking. Visit our Contact Us page and send us a quick note, your name and particulars will remain strictly confidential as always.

Not All Bad News For Equities

Interest in International Equities makes a lot of sense. This area has seen inflows of $21.85 Billion on a YTD basis, showing that historical returns certainly play on people’s minds. We simply hope that investors are not allowing themselves to be over-exposed to this asset class given how volatile it has been.

And on the Exchange Traded Fund (ETF) side, investors are seeing value in domestic equities, investing over $16.6 Billion into US Stock ETF’s. That is nearly the same amount as what left domestic equity funds. Morningstar attributes much of these inflows to $10.2 Billion new inflows in to SPY, the SPDR S&P 500, and $4.3 Billion to the Q’s.

So What Gives?

Perhaps it comes down to investor sophistication, knowledge and experience. The ETF number gives us something of an insight here because institutional traders like mutual funds will hold SPY for a variety of reasons. Our take is that if institutional investors are buying this way (they will not buy mutual funds) they believe in the power of domestic equities to turn a profit in the short-term.

The individual and retail investors who typically prefer mutual funds for their low fees, management characteristics and ease of entry are looking somewhere else. As a whole, they are not looking at potential; they are looking at numbers alone.

But not our readers, I am sure. Our position has been bullish on domestic equity funds. We have already hinted that our Top Pick for 2011 will be a domestic equity fund. And while this means nothing (anyone can make a top pick) take a look at the YTD performance of our two 2010 top picks:

Janus High Yield Fund (JAHYX) YTD = 12.6%
Ivy Small Cap Value fund (IYSAX) YTD = 10.9%

We digress. Figuring out the reason for such aggressive fund flows out of domestic equities is not just a brain teaser, but it also presents an opportunity for investors. In particular, large cap growth funds where so much money has left, present huge opportunities. Just look at the recently reviewed Sequoia fund, which leads its peers into double-digit returns on a YTD basis. We believe that domestic equity funds and possibly even large cap growth funds will tell a similar story in 2011.