Mutual Funds

Investors shifting from bonds in a slow return to US stocks

Traders worked on the floor of the New York Stock Exchange on Dec. 21, a week when investors added $335 million into US stock funds. At the same time, prices of bonds are dropping. Traders worked on the floor of the New York Stock Exchange on Dec. 21, a week when investors added $335 million into US stock funds. At the same time, prices of bonds are dropping. (Spencer Platt/Getty Images)
By Mark Jewell
Associated Press / January 2, 2011

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It appears investors are beginning to get comfortable with risk again. Not only are they pulling money out of bond mutual funds at the fastest pace in two years, but they’re slowly starting to embrace stocks again.

The shift in sentiment comes as positive economic news and robust corporate earnings lift stocks, which have risen 20 percent since the start of September.

Prices of bonds, typically less risky than stocks, are heading in the opposite direction. A broad measure of the bond market, the Barclays Capital US Aggregate Bond index, is down nearly 3 percent since early November. This reflects fears about rising interest rates, which effectively lower bond returns.

“You’ve almost got a one-two punch, with stocks up, and the bond market taking a pretty big hit,’’ says Ron Saba, director of stock research with Horizon Investments, a Charlotte, N.C., investment adviser for $3 billion in assets. “So now you start to see psychology take over. Investors say, ‘I want to invest where I’m making money.’ ’’

For the last few months, there has been a disconnect between the market’s gains and investor behavior. Investors have been withdrawing more money from US stock mutual funds than they’ve been adding. There hasn’t been a positive weekly net flow of cash since late April, according to the Investment Company Institute.

That has finally changed. The fund industry organization reported Wednesday that investors added a net $335 million into US stock funds during the week ended Dec. 21.

Although that’s a small amount — stock funds hold more than $5 trillion in assets — the switch to positive flow comes after the pace of US stock fund withdrawals has recently slowed.

Meanwhile, more than $20 billion has been pulled out of bond funds since mid-November, with the weekly outflow in mid-December marking the biggest in more than two years.

“At the end of the year, a lot of investors have been looking at what stocks have been doing and asking, ‘What am I sitting in bonds for?’ ’’ says Cleve Rueckert, a strategist with Birinyi Associates, a stock research and money management firm in Westport, Conn.

The Standard & Poor’s 500 stock index is up 15 percent this year including dividends, more than twice the return of the comparable bond index.

That has led to a massive shift into the relative safe haven of bonds. Investors have added a net $640 billion to bond funds since January 2009, according to ICI data. When investors have sought the higher potential returns of stocks, their search has taken them overseas. US stock funds have consistently seen money flow out, while funds buying stocks of foreign companies have taken money in.

But positive sentiment is coming home, especially with many recognizable US stocks faring well. Year-to-date, Apple Inc. is up more than 50 percent. Shares of NetFlix Inc. have more than tripled in value, and has nearly doubled.

Investing pros are also turning more positive. At least three surveys of money managers this month show growing confidence.

Some oft cited reasons:

■ Stocks remain cheap by the most widely used measures. The price-to-earnings ratio for Standard & Poor’s 500 index stocks was 15.75 on Thursday, based on earnings from the trailing 12 months, according to Rueckert. Over the past two decades, the average has been around 23.

■ Most economic indicators are positive. The deal between Congress and President Obama to extend Bush era tax cuts is expected to give the economy a short-term boost. Despite continuing housing market troubles, most data suggest the economic recovery is regaining momentum after stalling over the summer.