Mutual Fund Site

Equity mutual funds have been something of taboo for the year. Through to November 30, 2010, domestic equity funds have let go of $43.5 Billion, according to the latest information released by Morningstar. And possibly for good reason. According to its close on January 4, 2010 and December 17th close, the S&P 500 has gained just 9.8% this year. But it seems the stars are aligning at last and 2011′s equity funds are positioned to have a great year.

Morningstar Fund Flows Tell A Tale

The Morningstar fund flows tell an interesting story. For the most part, what we see that investors are starting to turn away from domestic bonds, preferring emerging markets and world bond funds instead. This makes sense, particularly when we heard about Greece’s problems earlier this year and more recently Ireland’s problems.

The popular belief that domestic bonds are in for a bumpy ride in 2011 is not just a retail investor’s theory. Bill Gross, the King of Bonds who manages the Total Return Fund at PIMCO and is considered The Authority when it comes to bonds within a mutual fund portfolio, will soon have the ability to purchase equity based securities like convertible bonds and preferred shares (not dividend paying common stock, though). The change to the portfolio’s modus operandi should come as no surprise given PIMCO’s company wide theme of a “new normal.” In addition, with interest rates already starting to make their move, this awesome fund is just adapting to changing times in order to provide investors with some kind of respectable returns or, at the very least, mitigate the risks within its portfolio.

Ultimately, the bond fund train will be out of commission for 2011. It could in fact be a very bad year for bond funds, so investors need to be very careful here. (However, it is reckless to shun the category altogether; even Bill Gross has kept personal money to the tune of $17.5 million invested in his fixed income mutual funds).

Equity Funds… 2011′s Shooting Star?

For the most part, domestic equity mutual funds missed the mark in 2011 unless you looked specifically at small cap funds and even midcap value funds. And this makes sense as domestic equities struggled with economic data that simply failed to ignite a market rally. In fact, many of those same equities struggled internally as well.

But for the most part, a lot of solid domestic companies were able to put programs in place that literally underline just how strong these equities will perform in 2011. We can start with increased dividends from large cap growth stocks like General Electric, Microsoft and Oracle. These are big companies that are clearly able to generate cash and revenues.

We also saw a return of Merger and Acquisition activity, specifically in the Industrial Materials area and in some Technology (Hardware) areas. The M&A activity has been important because it tells us just how bullish a lot of these companies are, not only in terms of growth within their specific sectors, but within the domestic economy itself. Business spending, remember, is a key economic indicator.

The latest Living Yield Curve at SmartMoney also has something to tell us: the economy is ready to start rapid expansion. With yield on the 3 month Treasury Bills more than 3 months lower than the yield on the 30 year Treasury bonds, the message is quite clear. We should be investing in assets that will benefit from strength in the economy; domestic equities.

And of course we have a slew of positive economic data, including durable goods orders, increased retail sales, lower unemployment claims and so many others that leave investors wondering if there really were economic uncertainties. But there always are…

Storms On The Horizon

Two key ingredients to that perfect recovery seem to be missing. That first thing is a recovery in housing activity. Although we have seen some improvements in the shape of increases in building permit applications, housing is expected to remain weak compared to pre-2008 levels.

The other thing we seem to be missing is a steep improvement to the unemployment rate, which remains dangerously close to double-digit territory (this is not to say that in some States, the unemployment rate is not dangerously higher than this level). So with these two storms still brewing, investors need to make a decision about what will happen: will they develop into serious storm systems or will they lose momentum and simply pass?

Our bet is that they will pass. As mentioned, the housing problems are already showing signs of recovery. And unemployment, while only improving on a marginal basis from one release date to the next, is much improved over where it stood even eleven months ago. These are positive signs for the domestic economy.

Best Bets Are On Domestic Equity Mutual Funds

The fundamental and technical realities suggest continued strength in domestic equities. With markets reaching multi-year highs and the Volatility Index touching multi-year lows, there is a strong argument in favor of continued market strength as we head into 2011. Combine these technical points with a contrarian view of where investors are indeed headed (we know they are unquestionably getting out of domestic equity mutual funds) and the best place to invest in 2011 is clear: Domestic Equity Funds.