June 1, 2016 / 4:25 PM / 3 years ago

U.S. stock funds record second-largest withdrawals this year: ICI

NEW YORK (Reuters) - U.S.-based stock mutual funds posted their second-largest outflows of the year, Investment Company Institute data showed on Wednesday, accelerating a rotation to the perceived safety of bonds during the latest week.

The stock funds recorded $6.3 billion in withdrawals in the week ended May 25, greater than any weekly period this year except the $8.1 billion pulled from the funds in late April. Four-fifths of the withdrawals struck funds invested in domestic U.S. stocks.

Investors have now pulled $142 billion from the funds over the last 52 weeks, the data show, a massive figure considering the S&P 500 has essentially held its value over that period. During the 52 weeks that ended March 11, 2009, which included the peak of the financial crisis, the stock funds bled $235 billion.

The withdrawals have come as fund managers have found it increasingly challenging to pick the right stocks.

“Just 21 percent of large-cap funds have outperformed the S&P 500 index in the first five months,” said Todd Rosenbluth, director of exchange-traded and mutual fund research at S&P Global Market Intelligence. “Hard to justify investors returning to active funds.”

Brad McMillan, chief investment officer for Commonwealth Financial Network, said investors have been leaving stock funds because they have been “scared,” a trend he expects to end as consumer confidence picks up.

“The fear trade has about run its course,” he said. “We’re at the extreme. It simply can’t get that much worse.”

In the meantime, bonds have prospered despite the risk of a U.S. Federal Reserve interest rate hike. In the latest week, bond funds netted $3.5 billion overall, according to ICI, a fund trade group.

“Amid market uncertainty, investors are focusing more on the safety that bond funds provide than the valuations,” Rosenbluth said. “While the likelihood of a Fed funds rate hike has increased, investors believe the bond yields will move modestly higher in the next year.”

Investment-grade bond funds took in $1.9 billion, their 13th straight week of inflows. U.S. municipal bond funds attracted $1.5 billion, and taxable government bond funds gathered $587 million, ICI said, extending an unbroken streak of popularity this year for the two categories.

The following table shows estimated ICI flows for the past five weeks (all figures in millions of dollars):

5/25 5/18 5/11 5/4 4/27/2016

Total equity -6,260 -1,169 -4,447 -3,030 -8,123

-Domestic -5,241 -2,013 -4,877 -2,371 -5,682

-World -1,019 844 430 -659 -2,442

Hybrid 225 -221 -313 -309 171

Total bond 3,497 3,676 4,140 3,531 8,223

-Taxable 2,001 1,494 2,127 2,034 6,358

-Municipal 1,497 2,183 2,014 1,497 1,865

Total -2,539 2,286 -620 192 271

Reporting by Trevor Hunnicutt; Editing by Frances Kerry

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