Lipper Fund Flows: Ebullient Equity Investors Respond to Stock Market’s Gains

The stock market’s gains so far in 2013 appear to be fueling investors’ enthusiasm for equity investments of all kinds – except, perhaps, for U.S. exchange-traded funds – as they begin to ease up on their previous risk aversion.

Mutual fund investors seem to be becoming increasingly confident in the outlook for stocks, as they allocated another $3.7 billion to the sector in the week ended January 23, according to data released late yesterday by Lipper.

So far this year, the Dow Jones Industrial Average has recorded only five days of declines, as broad market indices responded to those inflows by notching gains during each day of the most recent weekly period (cut short by a day because of the Martin Luther King Day observance). Once again, investors in U.S. stocks favored mutual funds over exchange-traded funds: the latter witnessed net redemptions of $3.1 billion, while investors put $1.4 billion to work in domestic mutual funds during the period. The S&P 500 ETF (SPY) accounted for all of that ETF redemption: investors pulled a total of $4.4 billion from that fund alone. This was the second week in a row during which equity ETF investors pulled back from these funds. Meanwhile, the appetite for all kinds of non-U.S. equity funds remained robust, with investors putting $2.2 billion into mutual funds and $2.3 billion into ETFs tied to non-U.S. indices.

Investors in taxable fixed income mutual funds extended their love affair with that asset class for another week, adding another $3.5 billion. ETF investors appeared less enthusiastic, but still contributed slightly more than $350 million to their bond portfolios. Loan participation strategies were among the biggest winners of the week, with ETFs and mutual funds focused on this approach attracting a net $704 million of inflows. Meanwhile, investors in lower-risk, lower-return funds, such as those investing in short-term Treasury and government agency securities, witnessed outflows in another sign that investors are willing to tolerate a greater degree of risk and shun safe haven options. Money market funds – perhaps the safest of these safe havens – saw another outflow, this time to the tune of $4.8 billion. While institutional investors added $2.4 billion to money markets, retail investors pulled out some $7.2 billion.

Municipal bond investors also slowed down the rate at which they have been contributing capital to these funds, and the sector witnessed net inflows of only $800 million for the week, significantly below the $1.4 billion average of the last two weeks.