Lipper Fund Flows: Fiscal Cliff Averted, Investors Embrace Risk

With a new (albeit temporary) budget agreement in place and signs that the economy may be on firmer footing, investors flung money into virtually all classes of funds in the week ended January 9, often at near-record levels, according to Lipper data.

The new year got underway with a bang, as investors purchased a net $34.2 billion of fund assets during the first full week of 2013. Part of this influx of buying came from the usual year-end funding of qualified retirement plans, but this year that was accompanied by jubilation that the government was able to agree on measures to prevent the country from plunging over the proverbial ‘fiscal cliff’ (albeit only with stopgap budget legislation that will require further action in only a few months) and by encouraging unemployment data.

Equity funds, both mutual funds and exchange-traded funds (ETFs) took in a remarkable $18.3 billion during the week ended Wednesday, January 9, according to data released late yesterday by Lipper. That is the fourth-largest weekly net inflow recorded by Lipper since it began tracking this data in January 1992. But investors also contributed respectable amounts of new assets to taxable bond funds and municipal debt funds during the week: these groups attracted inflows of $4.2 billion and $1.6 billion, respectively. Money market funds, meanwhile, pulled in another $10.1 billion during the five-trading day period.

These inflows took place against the backdrop of a rally in the stock market that took the S&P 500 index to its highest closing level since December 31, 2007 on the first Friday trading session of 2013. The catalyst for that rally was Congress’s passage of budget legislation that raised taxes on the wealthiest Americans and extended unemployment benefits, a last-minute agreement that avoided a toxic mix of forced across-the-board spending cuts and tax hikes that would, economists say, have wreaked havoc on U.S. economic growth. (The agreement has postponed the battle over spending cuts and taxes until the debate over U.S. debt levels resumes in a few weeks.) With that behind them, markets calmed down, and the rest of the week ended January 7 was calmer, with stocks pulling back slightly as investors turned their attention back to corporate earnings.

For the seventh week in a row, equity ETFs experienced net inflows, taking in some $10.8 billion, the largest sum recorded since last September. Breaking with the recent trend for ETFs, the SPDR S&P 500 ETF suffered a net redemption $1.3 billion (the largest for the group), while iShares: MSCI Emerging Markets Index Fund attracted net inflows of $2.9 billion, the iShares: Russell 2000 Index Fund pulled in $1.5 billion and the PowerShares QQQ Trust 1 reported inflows of $1.2 billion. Investors also rediscovered their enthusiasm for conventional mutual funds, which experienced inflows of $7.5 billion. That marked the twelfth-largest weekly net inflow since 1992, and group’s largest since May 2001.

The resolution of the budget agreement appears to have revived the risk appetite of investors. Domestic equity funds witnessed net inflows of $4.0 billion, while their nondomestic equity fund counterparts took in some $3.5 billion. Last year’s pariah from among the domestic funds, large-cap funds, became the biggest winner of the new year so far, attracting $1.9 billion of net new money. With respect to overseas funds, emerging markets funds continue to account for the single largest share of inflows, totaling $1.5 billion in the week that has just ended.

This willingness to embrace risk spread to the fixed income market as well, where investors allocated an additional $5.4 billion to taxable funds during the week. Of that, about $2 billion was directed into corporate investment-grade debt funds, with another $1.8 billion earmarked for Flexible Income Funds. For the second consecutive week, municipal debt funds (ex-ETFs) experienced inflows, taking in a net $1.5 billion. That marked their largest level of inflows since the week ended October 7, 2009, and their third largest recorded since 1992.

For more information on this week’s fund flows data, please visit Lipper’s fund flows website or watch the following video.