Mutual Fund Buzz: Investors Ease Back Into Stocks

After five straight months of net outflows, stock funds saw small inflows.

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Retail mutual fund investors may finally be changing their ways. After five straight months of outflows, stock funds saw inflows in October, according to the Investment Company Institute. Investors poured $441 million into stock funds in October, after pulling out almost $11 billion in September. This was mainly because investors continued to flock to foreign stock funds. World stock funds saw inflows of $7 billion in October, up from almost $4 billion in September. Investors continue to shun domestic stock funds, albeit at a lower rate. The category posted an outflow of almost $7 billion in October, down from an outflow of $14 billion in September.

ICI: Trends in Mutual Fund Investing October 2010

Recent fund flows have some experts worried that investors aren't making the right moves. For a number of reasons, including slow growth projections in the United States, investors remain skittish toward U.S. stock funds, but not foreign stock funds. From Reuters: Through November 17 this year, investors have pulled $74 billion out of domestic stock funds and put $41.8 billion into foreign stock funds, ICI data shows.

[See top-rated funds by category ranked by U.S. News Score.]

Lipper analyst Jeff Tjournehoj told Reuters: "There's a risk of going overboard. The fear is that people start putting money to work after the best money has been made." Of that money headed into foreign stock funds, about 97 percent has gone to emerging markets funds, according to a research paper from Vanguard. These countries are expected to see higher growth in the future, and advisers say investors should be exposed to that growth. The concern, however, is that investors are overexposed to the sector or unaware of the volatility that comes with investing in less transparent markets like China, India, and Brazil.

For investors wondering what an appropriate allocation to foreign stocks should be, Reuters lays out what the American Association of Individual Investors suggests. AAII says aggressive investors should allocate 20 percent of their portfolio to stocks of developed countries and 10 percent to emerging market stocks. Conservative investors should keep 5 percent in developed country stocks and nothing in emerging market shares.

Reuters: Analysis: Are investors going overboard on foreign funds?

[See U.S. News's 3 Funds for Easing Back into Stocks.]

The story for bond funds remains the same. Since the beginning of 2009, bond funds have seen consistent inflows. In October, investors funneled $24 billion into bond funds. But a look at weekly inflow numbers tells a different story, says Marketwatch columnist and founder of the newsletter Hulbert Financial Digest, Mark Hulbert. He cites TrimTabs Investment Research, which reports that bond funds saw a 99-week streak of consecutive inflows that was broken during the week ending November 17. TrimTabs estimates that $4.3 billion was pulled out of open-end bond funds in the United States that week.

Vincent Deluard, executive vice president at TrimTabs, tells Hulbert that the only other time in recent memory that one asset class saw such sustained inflows was in the years leading up to the Internet bubble in the 1990s. Later in the article, Deluard says it's been 26 years since the bond market suffered a "really severe correction." He cautions that once the tide turns, it could cause a sudden panic in the bond markets.

Marketwatch: Is the tide turning?

[See U.S. News's Why You Should Buy Stocks That Pay Dividends.]