Great expectations for an investment rotation

Published on NewsOK Modified: December 12, 2013 at 4:54 pm •  Published: December 12, 2013
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NEW YORK (AP) — After years of sticking with plain-vanilla bond funds, investors are starting to turn their backs on them and opt for stocks instead. The move isn't big enough to be the "great rotation" from bonds to stocks that many experts predicted -- it's more of a good rotation -- but fund managers say more is on the way.

Investors plugged $198 billion into stock mutual funds through the first 11 months of the year. That's the most since the dot-com stock bubble in 2000, according to Morningstar. Bond mutual funds are also taking in money, but the dollars are increasingly going only to niche corners of the market. Investors pulled $73 billion out of the largest category of bond mutual funds, intermediate-term bond funds, over that time. It marks a stark shift in behavior. Since the 2008 financial crisis, investors have largely sought the safety of bonds and shunned stocks.

Heading into this year, many strategists expected investors to dump their bonds and move into stocks en masse. Bonds had served investors well for three decades, but interest rates had fallen sharply. Stocks, meanwhile, have the potential to offer bigger returns. Early this year, there was no rotation, as investors were comfortable adding money to both stock and bond mutual funds.

"Then a switch went off in May," says Michael Rawson, a fund analyst at Morningstar. That's when worries about rising interest rates began to spike, which hurt bond prices. Investors have since increasingly shown their preference for stocks over traditional types of bond funds. Consider:

— In June alone, investors pulled $16 billion out of municipal bond mutual funds, according to Morningstar. Through November, investors have yanked a net total of $49 billion this year.

— Net investment in stock mutual funds and exchange-traded funds this year will likely top that of the four prior years combined, according to Strategic Insight, which tracks the mutual fund industry.

— In a sign of how the tide has turned, Vanguard earlier this week closed one of its stock mutual funds to most new accounts and re-opened two of its bond funds. Funds typically close to new investors when they're attracting lots of money and want to keep from getting too big and unwieldy. They re-open when they want to attract more dollars.

A major driver for the shift is fear that rising interest rates will hurt bond funds. When interest rates rise, prices for existing bonds fall because their yields suddenly look less attractive. During the summer, such worries flared as the yield on the 10-year Treasury note nearly doubled from 1.6 percent at the start of May to roughly 3 percent in September.

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