Fixed-income funds held their siren-like draw for investors, contributing largely to long-term mutual funds’ $16.8 billion in inflows in August, according to a Morningstar analysis.

“People are still very focused on bond funds,” says Russ Kinnel, director of fund research at Morningstar. It’s not really a bubble, because unlike in the past where investors have bet the farm on risky investments, they’re now pouring money into high-quality debt, although Kinnel notes that these funds’ low-return potential will eventually come back to haunt investors.

In the meantime, though, fixed income is king. Bond-heavy Pimco topped the fund families benefiting from this trend, with inflows of $7.7 billion, followed by Vanguard ($4 billion in inflows, down from $4.9 billion in July). “Pimco and Vanguard are the prominent players in this space,” Kinnel explains. “Out of the 20 or 30 largest funds, Pimco’s are the top three; it has the biggest funds out their when people want bonds, so right now everything’s coming up Pimco.”

That same month, domestic equity exchange-traded funds (ETFs) experienced outflows of $1.3 billion, ending a six-month run in which ETFs increased assets. The SPDR S&P 500 ETF was hit the hardest, with outflows of $6.6 billion, as investors sought safer or higher-yielding strategies instead.

Domestic equity mutual funds also lost money in August, down $14.3 billion. American Funds and Fidelity, both of which specialize in actively managed funds, saw outflows of $5.5 billion and $1.6 billion, respectively.

“American Funds’ basic mix is large-cap equity, and if that’s down, American Funds is hurting,” Kinnel says. “It’s also being punished for losing money in 2008. It did so well against the previous bear market, but the epicenter of the 2008 crash was large-cap value. It did a respectable job, but the continued outflows reflect unrealistic expectations.”

Equity funds are down a total $67.9 billion since the end of 2008, but don’t lament their demise just yet—that’s only 2.4% of their total $2.9 trillion total.

ETFs focused on international equities, especially those in emerging markets, represent one equity-based success story, with inflows of $4.4 billion in August. Investors also sought commodities exposure, the SPDR Gold Shares ETF in particular attracting $827 million.

Meanwhile, low rates on money market funds, which have lost $1 trillion in assets since February 2009, likely contributed to the bump in taxable bond funds, which year-to-date in August had garnered inflows of $168.5 billion.


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