Mutual fund investors continued to move cash into bonds and out of stocks last month. Fears about stock market volatility persisted despite the best September performance since 1939.
As a further sign of investors' more cautious ways, the amount of money being invested in bond funds is on pace to exceed $300 billion this year, Strategic Insight said Tuesday. That would trail only the record $350 billion in net new cash that flowed into bond funds last year, according to the research firm, which began tracking fund flows in 1987.
Before the market collapse in 2008 it was typical for stock funds to take in twice as much money as bond funds in any given month. But lingering volatility continues to leave investors wary of stocks.
That fear appears to remain strong, even though the Standard & Poor's 500 surged 9 percent last month. The index is up more than 70 percent since hitting bottom in March 2009.
Bond funds attracted nearly $26 billion in net cash flow last month, while a net of nearly $10 billion flowed out of stock funds, Strategic Insight said.
Overall, including both stock and bond funds, investors added about $16 billion more into mutual funds than they pulled out, down slightly from the $19.5 billion that flowed in during August.
Although investors fled stock funds, there was one bright spot for the category: funds specializing in overseas stocks. They drew more than $5 billion, while $15 billion flowed out of U.S. stock funds.
Avi Nachmany, Strategic Insight's research director, attributed those results to investors taking a more global approach to building portfolios.
"We observe it in Europe and Asia too, as investor sentiment toward home-country funds lags behind rebounding global stock markets," Nachmany said.
Although investors have consistently pulled more cash out of stock funds than they've put in over the past three years, stock funds still hold about $5 trillion. That's more than double the $2.3 trillion in bond funds.
Fixed-income investors continue to demand funds holding bonds that mature in less than 10 years. Strategic Insight said investors are using short- and intermediate-term bonds as alternatives to cash investments that are currently paying investors next to nothing, because interest rates remain near zero.
Money-market mutual funds, for example, saw $30 billion flow out in September, Strategic Insight said. Money funds are now returning about 0.04 percent, on average, according to the firm iMoneyNet.
The biggest long-term risk that bond investors face now is from interest rates. Bond prices will eventually decline because rates have nowhere to go but up. When the Federal Reserve eventually raises rates, prices for existing bonds with locked-in rates will drop. That's because investors will be able to buy newly issued bonds paying higher interest.