U.S. Bond & Stock Mutual Funds See Net Outflows of $34 Billion in August

 September 14, 2011 (PLANSPONSOR.com) - In an unusually volatile month, nervous investors redeemed an estimated $34 billion in net cash out of U.S. stock and bond mutual funds in August 2011 (in open-end and closed-end mutual funds, excluding ETFs and funds underlying variable annuities).  

A news release reports, August marked the third consecutive month of net outflows from long-term funds, after net outflows of $16 billion in July, according to Strategic Insight, a business intelligence provider to the worldwide fund industry.

Fund shareholders were clearly shaken by a dramatic month. August started with a protracted political fight over the federal government’s debt ceiling, capped by Standard & Poor’s decision on Aug. 5 to downgrade the U.S.’s long-term credit rating from AAA to AA+. The S&P 500 index ended August down 5.4%, but experienced extreme declines and rebounds along the way.    

Equity mutual funds saw a surge in net outflows in the second week of August, but then net outflows slowed to a pace more in line with recent months’ activity. 

“Our research over the past two decades shows that redemption spikes after stock market declines tend to be limited in scope and short-lived,” said Avi Nachmany, SI’s Director of Research. “However, continuing doubts about the U.S. economy and the European sovereign debt problems are reducing investors’ appetite for equity risk.”

Equity mutual funds saw net outflows of $23 billion in August, compared with net outflows of $24 billion in July. U.S. equity mutual funds saw net outflows of $21.4 billion in August, and international/global equity funds saw net outflows of $1.4 billion.

Bond mutual funds saw net outflows of $11 billion, compared with net inflows of $8 billion in July. Taxable bond funds experiences net outflows of $10 billion, and muni bond funds experienced net outflows of $1 billion. Leading the way in net outflows were floating rate and high-yield bond funds, both of which are sensitive to fears of a recession. The bright spots were corporate short- and intermediary-maturity bond funds, which together took in $6 billion in positive flows as some investors continued to search for alternatives to low-yielding cash vehicles.  

 “Bond funds’ net flows seemed to turn positive at the end of August,” said Nachmany. “Given the expectation of continued volatility and the Federal Reserve’s intention to keep interest rates extremely low, demand for select bond funds should rebound.”  

Money-market funds saw net inflows of $69 billion in August, benefiting from a flight to safety. That was a reversal from July, when money funds had net outflows of $113 billion. In the first eight months of 2011, money funds experienced total net outflows of $183 billion.

Separately, Strategic Insight said U.S. Exchange-Traded Funds (ETFs) in August experienced nearly $1 billion in net inflows. Leading the way in net inflows were large blend ETFs (nearly $5 billion in inflows), leveraged ETFs ($3 billion) and ultra-short maturity bond ETFs $2 billion); Diversified emerging markets ETFs saw the biggest net outflows (nearly $2 billion).

Through the first eight months of 2011, ETFs (including ETNs) saw net inflows of $89 billion, a pace that could still produce the fifth straight year of $100 billion or more in inflows to ETFs. At the end of August 2011, U.S. ETF assets stood at $1.06 trillion.