T. Rowe Price closed its High Yield Bond Fund in April to new investors to protect returns for existing investors. The action was a result of an abundance of inflows into fixed-income funds.

About $33.3 billion flowed into bond funds in October, according to the Investment Company Institute (ICI), and the money has continued to flow in this month.

“If we take in too many assets, we risk performance for our existing investors. Because we need high yield open as an asset allocation for our target-date strategies, we’re hyper-sensitive to liquidity and capacity," said Mike Gitlin, director of fixed income at T. Rowe Price where high-yield assets total $23 billion.

Even though equity funds have outperformed bond funds, outflows from equity funds totaled $16.7 billion in October, according to the ICI.

"The bloodletting is caused by institutional and individual investors buying into alternative and fixed-income investments while selling off equity funds. The trend will end when investors realize that alternative investments have produced a lower rate of return than equity funds and when interest rates start to rise," said Brien O'Brien, co-manager of five Advisory Research equity mutual funds. "What investors have benefitted from is reduced volatility by trading higher returns for lower volatility."

Morningstar reports that the average bond fund returned only 7.5 percent year-to-date through November 19, compared with 10 percent for the average stock fund.

October data from Bank of America Merrill Lynch show that hedge funds are continuing their heavy sell off of U.S. equities.

“We’re crossing into correction territory but I hope that the 10 percent sell off in the equity market since September is not leading to a larger sell off of 20 percent which would put us in a bear market,” said Matt Reiner, who manages the Adirondack Small Cap Fund (ADKSX). “What’s partly causing a correction is investors locking in gains by selling equities in the face of potential tax increases next year.”

The S&P 500’s total return was .49 percent through November 16, compared with the HFRI Fund Weighted Composite Index return of -.32% through November 16, according to HedgeFundResearch.com.

“In order to go into equities, people need to feel more confident about the prospects of the markets going forward. For that confidence to occur, we need some resolution around the fiscal cliff. If that happened, we would expect to see inflows within three to 12 months as investor confidence in equity markets improved,” said John Linehan, director of U.S. equity at T. Rowe Price and co-manager of the U.S. Large Cap Value Strategy Fund.

Certain fund managers defer to the S&P 500’s all time high of 1576 on October 11, 2007, as a benchmark.
“Inflows into equity funds will begin to reverse when the stock market is within 5 percent of its previous high,” says Charlie Smith, manager of the Fort Pitt Capital Total Return Fund (FPCGX), which is 85 percent invested in equities. “Many retail investors see a recovery to previous highs as a safe signal which would allow them to begin buying equity funds again.”

But currently the S&P 500 hovers about 13 percent below 1576, according to Broadway Bank.

“The S&P 500 will return to its high over time as corporate earnings continue to grow. If the U.S. economy grows at a 2 percent to 2.5 percent rate over the next several years, S&P 500 earnings should approach $115 per S&P share, which is quite reasonable given the low interest rate environment. This could result in new highs for the index,” said Smith, whose fund has outperformed the S&P 500 by 1 percent to 2 percent annually, according to Morningstar.

The lower the valuation, the more attractive the entry point and potentially the greater returns investors will receive.

“We consider the valuation level of the S&P 500 as an indicator. At 1350, give or take 10 points, it’s an attractive level for investors. I expect the bloodletting around equity funds to stop by the end of the year,” said Robert Sullivan, who manages the Satuit Capital U.S. Emerging Companies Fund (SATMX), which is 100 percent invested in U.S. domestic equity securities.