Investors take stock risk while exiting money market funds-EPFR

NEW YORK Fri Nov 2, 2012 3:30pm EDT

NEW YORK Nov 2 (Reuters) - Investors worldwide put money in U.S. stock funds for the first time since mid-September while emptying out of money market funds in a sign of renewed vigor for stocks, data from EPFR Global showed on Friday.

U.S. stock funds attracted $1.06 billion in inflows in the week ended Oct. 31, the first batch of new money for the funds since raking in $7.51 billion in the week following the Federal Reserve's announcement that it would buy $40 billion in mortgage-backed securities per month until the job market improves, the fund-tracking firm said.

Overall, net inflows of $2.8 billion into stock funds worldwide were also the most since the week ended Sept. 19, when the funds attracted massive inflows of $17 billion.

Money market funds, which are known as a safe place to store cash but offer scant yields, had outflows of $28.4 billion over the recent period, the biggest outflow since June, according to EPFR Global.

MONEY POURS INTO BOND FUNDS

Inflows into U.S. bond funds, meanwhile, still exceeded stock funds at $1.59 billion, while bond funds worldwide attracted $5 billion in new cash.

High-yield bond funds had rare outflows of $211 million, just the second time the funds have lost money since June according to the fund-tracker.

The benchmark S&P 500 rose 0.24 percent over the reporting period after mixed corporate earnings - including weak reports from Apple Inc and Amazon - and data showing investment by U.S. businesses stalled in September.

U.S. stock markets were closed on Monday and Tuesday in response to widespread flooding and power outages in the U.S. Northeast as a result of Hurricane Sandy.

The large money market fund outflows and inflows into equity funds suggest that investors may have warmed up to risk over the period.

Many open-end mutual funds may have moved cash from low-yielding money market funds into stock funds in order to reduce their cash hoards ahead of fiscal year-end statements, said Edward Painvin, chief investment officer of Chase Investment Counsel, which oversees $600 million.

Painvin added that investors may be buying on market weakness in order to reap future profits, and that certain stocks such as Starbucks Corp and Priceline.com Inc have delivered "pleasant surprises" during the earnings season.

Funds that hold emerging market stocks were still in demand, with inflows of $918 million, but less so than the previous week, when the funds attracted $2.55 billion.

APPETITE FADES FOR EUROPEAN STOCK FUNDS

European stock funds suffered modest outflows of $64 million after inflows of $1.13 billion the previous week, while European bond funds kept up less demand, with inflows of $1.25 billion after inflows of $2.26 billion the previous week.

"Most investors feel that the gains have already been made" and are waiting for an "outright solution" to Europe's debt crisis, said Jeffrey Sica, chief investment officer of SICA Wealth Management, in Morristown, N.J.

The outflows of $211 million from high-yield bond funds could indicate that investors are starting to doubt the profitability of the asset class as well.

"There's very little value left in high yield relative to Treasuries," Painvin said.

The average current yield on the Bank of America Merrill Lynch US High-Yield index is 6.6 percent, according to St. Louis Federal Reserve data, while the U.S. 10-year Treasury note yielded 1. 7 278 percent in intraday trading on Friday. Some stronger-than-expected corporate earnings from companies such as Procter & Gamble pushed Treasury prices down to yield 1.8206 percent on Oct. 25.

While high-yield bonds lost demand, investors sought income in emerging market debt funds, which attracted $1.08 billion in new money, and were roughly unchanged from inflows of $1.2 billion the previous week.