(Dow Jones) Investors continue to be risk averse--shunning stocks in favor of bonds--and paying the price. ??
Investors put an estimated net $30 billion into U.S. mutual funds in February, $24 billion of which went to bond funds, while diversified stock funds experienced net outflows of $3.4 billion, according to Strategic Insight.
And despite the stock market's gains in the month, 401(k) participants who reallocated shifted about $285 million to fixed-income investments from stocks, according to the Hewitt 401(k) Index. The index tracks daily transfers of nearly 1.5 million 401(k) plan participants with nearly $90 billion in collective assets. ?
The preference for bond funds is likely to persist for a while, said Avi Nachmany, director of research at Strategic Insight. ??"Continued unemployment and economic anxiety weigh on investors," he said. "As a result, few such investors are adding to their holdings, especially their equity holdings."
So far this year, investors have placed a net $73 billion in U.S. stock and bond funds, according to Strategic Insight. In the first quarter, net inflows to stock and bond funds may exceed $100 billion, a stark reversal from last year's first quarter, when less than $10 billion went into the funds, it said. These estimates include open- and closed-end funds, but exclude funds underlying annuities or exchange-traded funds. ?
As encouraging as that turnaround is, investors continued to shun stocks in the month, as the Standard & Poor's 500 index gained 2.9%. Of the net $24 billion that went into bond funds in the month, $10 billion went to short- and intermediate-maturity corporate bond funds, Strategic Insight estimates. More than $4 billion was placed in global bond funds in the month, and $2.5 billion went into Treasury-Inflation-Protected Securities funds, it said.
In contrast, investors took money out of diversified U.S. stock funds on a net basis in February as the average domestic stock fund gained 3.4%, Strategic Insight said.
Again reflecting their cautious attitude, investors put about $2 billion into long-short/market neutral stock funds, it said. That category may break last year's record of $13 billion in inflows, it said.
Investors naturally extend their investing time horizons when they're optimistic and contract them when they're pessimistic, said Nachmany. With what's occurred in the past two years, investors have not just shrunk, but collapsed their time horizons, he said. "We've developed this very limited tolerance for the obvious volatility of stock prices." ??
Investors did place some faith in international stock funds, placing about $6.5 billion into international stock funds in the month, including $2 billion into global tactical asset allocation funds and the balance into global diversified funds, Strategic Insight said. ?
Separately, investors put a net $5 billion into exchange-traded funds in February, a turnaround from the net redemptions in January, according to Strategic Insight. U.S. equity, short-term bond and equity sector ETFs too in the most money, it said. ?
As for 401(k) participants, their transfers favored both Guaranteed Income Contract/stable value funds and bond funds in February; nearly 47% and 37% of the funds transferred went to those categories, respectively, according to Hewitt 401(k) Index.
In contrast, nearly all equity assets classes experienced net 401(k) transfers, it said. ?
Through the decline, 401(k) participants moved about 6% of their assets into fixed-income investments from equities, but since the end of March 2009, they've moved only about 1% back into equities, said Pamela Hess, director of retirement research at Hewitt Associates.
"A lot of people missed the rebound from either moving out of equities or not rebalancing," Hess said. "People are missing out. There's criticism of target-date funds, but I would argue that they're way better than what's happening here."
Copyright (c) 2010, Dow Jones. For more information about Dow Jones' services for advisors, please click here.