Investors return to US stock funds in January

[February 12, 2011]  BOSTON (AP) -- There's another sign that investors' confidence is returning: Last month they added money to U.S. stock mutual funds at the fastest clip in seven years. The year-opening surge also marked the first time in nine months that investors added more than they withdrew.

All told, investors deposited a net $21.3 billion to U.S. stock funds in January, the biggest monthly increase since a net inflow of $23 billion in February 2004, industry consultant Strategic Insight said Friday.

Last month's surge also snapped a string of net withdrawals that began in May. The last time there was a positive inflow of cash into domestic stock funds was April, when a net $11 billion came in.

Investors soon reversed course after the stock market's May 6 "flash crash" single-day plunge. Fears about Europe's government debt crisis also peaked that month.

But the stock market has now risen five consecutive months, and the Standard & Poor's 500 index is up about 26 percent since Sept. 1. Corporate earnings are approaching record levels, and most economic indicators suggest the recovery is gaining momentum.

"The interest in stocks is being shored up by a new year, and stock prices which have doubled since their bottom in early 2009," said Avi Nachmany, research director with New York-based Strategic Insight.

He also cited improving prospects for stocks of large U.S. companies. Those stocks, which anchor many individual investor portfolios, lagged stocks of smaller companies until recently.

Another factor driving the return to stock funds: Worries about volatility have eased after the past few weeks' run of modest, steady gains for stocks. The Chicago Board of Options Exchange's Volatility Index returned this week to the same level it had been in mid-2007, just before the stock market's historic peak. During the worst of the financial crisis the following year, the VIX, as market pros call it, was roughly four times higher than it is now.

Market optimism has also been building. For 23 consecutive weeks, surveys by the American Association of Individual Investors have shown a greater-than-average belief that stock prices will rise. The last time the surveys had such a long streak of bullish sentiment was in 2004.

Although political unrest in Egypt has shaken many investors in the world's emerging markets, U.S. investors last month continued to add more than they removed from funds buying foreign stocks. This extended an eight-month positive streak, Strategic Insight said. Investors added a net $12.5 billion to those funds, a category that also includes stocks of companies in developed markets like Europe and Japan.

Sentiment among bond investors was mixed in January. Investors shifted out of bonds in November and December as many funds posted investment losses while fears of rising interest rates mounted.

Although returns were mostly positive last month, the money added to taxable bond funds was offset by a movement out of municipal bond funds. Investors added a net $12.8 billion to taxable bond funds, a category that includes corporate bonds, while $12.7 billion flowed out of muni bond funds, which buy the debt of state and local governments.

Investors have been pulling out of muni bonds since early November, largely due to fears about the declining fiscal health of many states and cities, and their ability to satisfy debt obligations. The federal government's recent extension of Bush era tax cuts also has made the tax advantages that munis offer less enticing, because low rates on other forms of investment income have been extended.

In contrast, investors have been drawn to taxable bonds recently. That's because such bonds have been an attractive source of income compared with the current near-zero yields for money funds and bank deposits, Strategic Insight said.

The firm expects bond fund flows to remain strong this year, although not as robust as last year. A net $222 billion flowed into bond funds in 2010, second only to the record of $350 billion in 2009.

Before the stock market meltdown in late 2008, it was common for stock funds to take in twice as much money as bond funds in any given month. Since that time investors have mostly been pulling their money out of U.S. stock funds, and shifting into bonds, or foreign stock funds.

[Associated Press; By MARK JEWELL]

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