All it took was 5 years: Stock funds gaining more believers

AP News
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Posted: Jan 22, 2015 4:55 PM

NEW YORK (AP) — It looks like we really are giving the stock market another chance.

Last year was the second in a row that investors put more money into U.S. stock funds than they took out. Now that stocks have roughly tripled since hitting a bottom in March 2009, faith is building in what analysts had been calling the most-doubted bull market of their careers.

Even so, investors aren't placing their faith in just any investment. They're overwhelmingly choosing funds that mimic the Standard & Poor's 500 or another index, and they're dumping those run by stock pickers. Last year stock index mutual funds and exchange-traded funds attracted a net $166.6 billion, according to Morningstar. At the same time, $98.4 billion went in the opposite direction out of actively managed ones. The split is most pronounced, by far, in funds that focus on the broad U.S. stock market rather than foreign stocks or specific industries.

Rejecting stock pickers is not new. Investors have been pulling money from them since before the Great Recession started in December 2007. It's the move into index funds that has accelerated.

Among the attractions of index funds are lower fees. As a group, they kept $12 of every $10,000 invested to cover expenses in 2013, according to the Investment Company Institute. For actively managed funds, it was $89.

Index funds have also performed better in recent years. Consider large-cap stock funds, which generally benchmark themselves against the S&P 500. Over the five years through June 30, only 13 percent of them matched or beat the index, according to S&P Dow Jones Indices.

The struggles of portfolio managers have come because stocks have generally been moving in sync with the broader market. When stock movements are this similar, it becomes that much harder to find ones that can beat an index by a wide margin.

Stock pickers say they are now poised to prosper. Because stocks have been rising to such a similar degree, managers say many are improperly priced. The stocks are either too high or low versus where their earnings and other fundamentals say they should be, which provides the pros with more opportunities to pick future winners. Of course, those same managers were making a similar argument a year ago.

Among other trends last year:

— WHAT FOREIGN WORRIES?

The U.S. economy is the envy of the world, but it wouldn't appear that way based on where investors put their money.

Last year $144.2 billion flowed into mutual funds that specialize in foreign stocks, more than double the amount that went into U.S. stock funds. The dollars came despite worries about slowing growth or outright recession in China, Japan and Europe.

Part of the allure may be the sizeable stimulus programs that central banks in those areas are implementing. The European Central Bank announced a bond-buying plan Thursday to invigorate its economy, for example. The Federal Reserve, meanwhile, has ended its bond-buying program and is expected to raise interest rates later this year for the first time since 2006.

The migration into foreign stock funds is also part of a move to get some U.S.-heavy portfolios more in line with the global market. Foreign stocks make up nearly half of the global market, but they play a much smaller role in many 401(k) and other accounts.

— WHAT BOND BUBBLE?

For years, warnings have blared that interest rates have nowhere to go but up after falling for three decades, and that will mean big losses for bond funds.

The predictions, though, were wrong last year when interest rates ended up falling. Many bond funds had positive returns and the average long-term intermediate-term bond, the largest category by assets, returned 5.2 percent.

The drop in interest rates helped taxable bond funds attract a total of $87.6 billion last year. The numbers are lower than they would have been if star fund manager Bill Gross hadn't surprised the market by leaving PIMCO's Total Return fund in September. The news helped fuel a rush by investors to withdraw $78 billion by year's end, according to Morningstar.

— WHAT 'SUPER CYCLE'?

China's appetite for oil, copper and other raw materials was so voracious in the 2000s and earlier this decade that analysts said the market was in the midst of a commodities "super-cycle." Mutual funds and ETFs sprang up to help investors join in, giving access to everything from platinum to soybean oil to coffee.

But the super-cycle ground to a halt last year due in part to slowing growth in China and other emerging markets. The price of crude oil dropped by nearly half, and copper fell 16.8 percent. The falling prices pushed investors out of commodities funds, and they withdrew $3.5 billion.