Investors prepare for more volatility in 2012

NEW YORK Mon Dec 5, 2011 4:59pm EST

The Anak Krakatau volcano spews ash and smoke in the Sunda Strait November 10, 2007. REUTERS/Supri

The Anak Krakatau volcano spews ash and smoke in the Sunda Strait November 10, 2007.

Credit: Reuters/Supri

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NEW YORK (Reuters) - Whether or not Europe resolves its banking crisis, the United States its deficit or China its cooling economy, U.S. investors should be prepared for more volatility in 2012.

This year's roller coaster sent billions of dollars to the sidelines but also rewarded many investors who stuck with bonds and dividend-producing funds. These are some of the key issues fund managers, such as Dan Fuss of Loomis Sayles and David Giroux of T. Rowe Price (TROW.O), will examine during the 2012 Reuters' Global Investment Summit Outlook taking place next week in New York, London and Hong Kong.

THE BIG PICTURE

The U.S. fund business saw net outflows of $62.9 billion through November 30, according to Lipper, a Thomson Reuters unit that tracks mutual fund data. While equity funds were down by almost $21 billion, taxable fixed-income funds took in almost $167 billion, says Tom Roseen, a senior analyst at Lipper.

"There was a tale of two cities in the equity universe," Roseen says. "Open-end funds witnessed outflows of $51.35 billion, while their ETF counterparts saw net inflows of almost $30.5 billion." Why? ETFs appeal to investors -- especially institutional investors -- because unlike mutual funds, they can be traded all day. "They could be in and out in a matter of moments," he says.

Cost and availability also make ETFs appealing, especially to institutional and large investors, says Fran Kinniry, a principal in Vanguard's Investment Strategy Group.

EQUITY WINNERS

With interest rates low and volatility high, investors sought returns from bonds and dividend-producing equities. Winners include commodity and precious metals funds, which top the list with gains of 5.56 percent through mid-November. Other winners: traditional income payers such as utility funds with 5.24 percent gains and real estate funds, which rose 2.26 percent. "People are now saying we are looking for growth, but we also want to get paid," says Roseen. "We want dividends."

James Swanson, chief investment strategist, MFS Investment, says many companies have great balance sheets and likely will continue "to keep paying those dividends or even increase them," Swanson says. He especially likes the tech sector, which has little debt and a worldwide market.

One loser: world equity funds, which posted the worst performance of the equity macro groups. This category fell 14 percent through mid-November, even though it attracted $24.9 billion in new money, according to Lipper. The category was dragged down by the financial crisis in Europe as well as growing concerns about China, says Roseen.

FIXED-INCOME FUND

In 2011, fund winners were with the ones with the word "Treasury," says Roseen. General U.S. Treasury funds returned 15.67 percent as of mid-November. Treasury inflation-protected securities (TIPS) posted an almost 11 percent gain. Global income funds with 3.47 percent growth in assets gained $20.6 billion, the largest amount of net new money.

TAX-EXEMPT FIXED-INCOME

Even though investors got frightened by the headlines of massive defaults and naysayers pulled out, these funds had positive returns. In some instances, the gains were quite significant, says Roseen. For example, California municipal debt funds gained 9.31 percent through mid-November. He says there wasn't the massive melt down of the muni bond market that analyst Meredith Whitney had predicted, and returns were fairly strong.

Analysts agree one thing is for certain: 2012 will likely be another volatile year. That, says Kinniry, makes diversification and long-term planning even more important. "If investors are going to get this right," he says. "They need to develop an asset allocation plan and really try not to get the short-term market to run their emotions."

(For other news from the 2012 Reuters Investment outlook Summit, click here)

(For summit blog: blogs.reuters.com/summits/)

(This story corrects year in 3rd paragraph from bottom to 2011 instead of 2012)

(Editing by Lauren Young)

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