Diversification Leads to Stellar Growth of Mutual Funds in 06

January 24, 2007 (PLANSPONSOR.com) - "Prudent diversification" was a main contributor to the over $1.6 trillion growth in mutual fund assets in 2006, according to a Strategic Insights analysis.

During 2006, the average equity fund investor earned 16.4% and money market mutual fund yields rose to 5%, according to a Strategic Insights news release. Among equity fund investors, diversification away from the U.S. and into International funds aided in asset growth. International/global equity funds saw net inflows of $190 billion in 2006.

“Investors and their financial advisers are increasingly focused on prudent diversification,” commented Avi Nachmany, Strategic Insight’s Director of Research, in the news release. “Rapid growth of funds-of-funds and other pre-packaged allocation programs such as mutual fund “wraps,” atypical investments in bond funds in the face of the flat yield curve lately, and the extraordinary interest in international funds are just a few manifestations.”

By year-end 2006, according to Strategic Insights, assets held in all types of U.S. registered mutual funds had eclipsed $11 trillion, including:

  • traditional open-end funds – $9.3 trillion;
  • VA underlying funds – $1.3 trillion;
  • ETFs structured as mutual funds – $309 billion, plus additional assets in ETFs structured as UIT ETFs and ETF-like non-RIC exchange-traded vehicles; and
  • closed-end mutual funds – nearly $300 billion.

The asset-weighted average total return for different asset classes for the one-year period as of December 2006 was:

  • Domestic equity – 14.1%,
  • International equity – 24.2%,
  • Taxable bond – 5.4%, and
  • Tax-free bond – 5.1%.

Other 2006 highlights found by the Strategic Insights analysis included:

  • Mutual Fund Cash Flows (including VA funds): Full year industry cash flows are estimated at $540 billion. Money Markey fund inflows reached nearly $230 billion. Bond fund inflows totaled about $75 billion, remarkable gains during a flat / inverted yield curve period, and mirroring fund investors’ relentless advance towards prudent diversification. Equity and balanced funds garnered the balance $235 billion or so in inflows.
  • Among fund management companies with over $1 billion in assets at the beginning of the year, about 60% attracted positive cash flows last year. But a steady pace of M&As and ownership restructuring persisted for both large and smaller managers.
  • Funds-of-funds: Flows into all kinds of fund-of-fund programs added up to $111 billion in 2006, 35% above the prior record of 2005. Most of 2006’s upsurge in funds of funds flows is attributed to target-date lifecycle funds.