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World Equity Fund Inflows Outpace Domestic Rivals

Running contrary to declines in the broader market from March to April, equity mutual fund inflows increased month over month by about $3.5 billion, or roughly 24%, according to Lipper Senior Research Analyst Andrew Clark.

The increases, however, came on the strength of world equity funds, which grew from $7 billion in March to $11.3 billion in April, led principally by the international funds sector, which enjoyed inflows of $8.8 billion. That represents a spike of $3.6 billion versus April. Global funds sector inflows were up by $2.4 billion to $3.1 billion.

Closer to home, domestic equity funds sputtered slightly in April. Mixed-equity funds followed suit by adding $4.5 billion in April versus $5 billion in March, while bond funds witnessed a modest outflow of $0.1 billion in April.

"While we are still seeing relatively flat real wage and salary growth, the monthly increases in retail sales have started to slow since January of this year, and retail investors parked an estimated $2.2 billion in money market funds in March," Clark explained in his monthly fund flow report.

"We think it was the latter factors of slowing growth in retail sales and investors wanting to earn more than money market rates that helped drive total equity fund flows up for the month of April," he said.

Clark expects that outflows from money market funds will continue to shrink in the coming months. While he won't speculate on what that might mean for the equity funds market, Clark noted that "rising liquidity in the long run is as almost surely a positive for equity fund flows."

Breaking down April stock fund flows further, Lipper data reveals a $1.2 billion improvement in inflows for S&P 500 Index funds. U.S. domestic equity funds were relatively flat month over month, Clark said, as outflows totaled $0.3 billion. Sector equity funds bled slightly more, he added, with outflows of $1.3 billion in April versus outflows of $0.6 billion in March.

By contrast, world funds added $4.3 billion in the month-over-month period. Clark said activity in the two world funds sectors confirms a 16-month trend of investors chasing returns overseas and a continuing tendency among U.S. investors to treat domestic and world equity funds as economic equivalents. Large-cap core funds, however, ended April with better returns than international funds, he noted, due largely to a rising greenback over the final four days of the month.

But extending Lipper's dataset back to the end of February 2005, Clark observed, international funds haven't performed any better and, in some case, have underperformed both large-cap and multi-cap core funds on a cumulative basis.

"All of this underperformance or similar performance of international funds versus large-cap funds and multi-cap funds is due entirely to the movements of the U.S. dollar and its various crosses," Clark said.

"It makes one wonder when U.S. investors are going to realize that the dollar is probably in for a choppy ride, just as it has had since the beginning of the year, and that domestic equity investments may now be the better investment vehicle," he continued.

Clark, however, noted that while investors are chasing returns overseas, they are doing so cautiously by sending most of their money into multi-cap funds. As a final note on the trend to international funds versus domestic funds, Clark reiterated Lipper's previously stated guidance that as the dollar declines investors will be rewarded for their international investments, but as it strengthens they might want to consider markets where stock performance is driving returns, such as Asia, rather than making money on currency bets.

Closer scrutiny of domestic equity fund flows reveals that large-cap funds sustained a particularly cruel month in April, as inflows were off by $9.2 billion. Multi-cap funds enjoyed $10.3 billion in inflows, while overseas funds, multi-cap value and multi-cap core were also represented among the top performers in month-over-month measures. Small caps were down $1.6 billion.

"It seems investors are apparently seeking the safety of multi-cap funds, which tend to perform somewhere between small-cap funds and large-cap funds, and they will continue to do so until the market sorts out who the winner of the capitalization race will be," Clark said.

On the sector equity side, he added, net outflows were the story once again (see table, pg. 2). Science and technology were the inauspicious leaders in that camp with negative flows of $1.5 billion. Minus science and technology, sector fund outflows totaled $0.1 billion in April.

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