Retail investors are returning, inch by inch

Balanced funds recording record inflows as non-institutional buyers cautiously embrace stocks

Jun 2, 2013 @ 12:01 am

By Bloomberg News

Investors are pumping record amounts of money into U.S. balanced funds, whose freedom to buy stocks and bonds has made them barometers for gains in the biggest bull markets of the past half century.

Managers led by Capital Research & Management Co. and Invesco Ltd. received $35.2 billion from January to April, the most in any four months, according to data compiled by Bloomberg and the Investment Company Institute.

Assets in the funds increased 3.6%, compared with 1.2% for those that buy only equities.

Although valuations and trading volume show that individuals burned during the financial crisis have been slow to join the record-breaking rally in the S&P 500, the growth of funds that now balance more than $1 trillion in stocks and bonds shows that the reluctance is easing. Deposits with hybrid funds reached records in February 1994, when the S&P 500 was in the middle of a 417% gain, and in April 2004 amid a 101% rally.

“It shows the early stages of the healing process and reduction in this still-pervasive negative psychology about the stock market,” said Michael Holland, chairman of Holland & Co., which oversees $4 billion. “We're four years into a bull market, and levels of stock ownership remain very, very low.”


The Holland Balanced Fund (HOLBX) has beaten 96% of its peers in 2013 and 70% in the past five years, according to Bloomberg data.

Mr. Holland has about 30% of the funds in investments other than equities, mostly short-dated Treasuries, and favors large-cap companies in the stock market. Among the top holdings are Home Depot Inc. (HD), Berkshire Hathaway Inc. (BRK) and 3M Co. (MMM), which have outperformed the S&P 500 by at least 3.1 percentage points this year.

As of last Monday, the S&P 500 had risen 144% since bottoming in March 2009 during the worst financial crisis since the Great Depression.

Among the biggest managers in hybrid strategies, Capital Research's American Balanced Fund (RLBGX), which has 70% in equities and about 29% in bonds, has seen assets increase 11% to $61.9 billion year-to-date, compared with an 8.9% increase a year earlier. The fund's top three equity holdings are Home Depot, Chevron Corp. (CVX) and Berkshire Hathaway.

Invesco V.I. Equity & Income Fund's assets are up 17% to $1.1 billion. The fund has 65% in stocks and about 28% in bonds, and owns eBay Inc. (EBAY) and JPMorgan Chase & Co. (JPM), according to data compiled by Bloomberg.

U.S. mutual funds that own equities and bonds have returned about 8.8% on average this year, compared with the S&P 500's 16% gain and a loss of 1% for 10-year Treasuries, according to Bloomberg data on mutual funds with an average allocation of 62% to equities and 25% to bonds.

With the S&P 500 posting its best return for the first four months of the year since 1998, balanced funds have added more than twice the $16.5 billion U.S. equity funds received, data from Bloomberg and the ICI show.

Individual investors bought and sold more stock last quarter than in the previous one.

Daily trades at brokerage firms E*Trade Financial Corp., TD Ameritrade Holding Corp. and The Charles Schwab Corp. rose about 14% in the first three months of the year, according to data compiled by Bloomberg.

“One of the common denominators for funds that are gaining a lot of assets is that they have very flexible mandates,” said Michael Fredericks, head of retail multiasset client solutions for BlackRock Inc.

He manages the BlackRock Multi-Asset Income Fund (BAICX), which oversees $3.4 billion and was launched in 2008, and the BlackRock Multi-Asset Real Return Fund, which was launched last year.

“You had huge drawdowns in 2008 and 2009,” Mr. Fredericks said.

“A lot of investors reflected on that experience and thought, "I might not have the stomach for buy-and-hold. Isn't there a better approach to building portfolios that doesn't subject me to so much risk and volatility?'” Mr. Fredericks said.

The last two times that hybrid deposits peaked, the S&P 500 kept gaining.

In February 1994, about $18.6 billion was added to the funds over four months, and the S&P 500 more than tripled for the next six years, data compiled by Bloomberg show.

When deposits reached another high of $22.3 billion by April 2004, the equity gauge advanced more than 40% through October 2007.

U.S. equity-only funds saw an increase the year after hybrid flows hit a record in 1994.

They received $112.9 billion in 1995, up 61% from the year earlier, surpassing $100 billion for the first time ever, ICI data show.

The flows into hybrid funds are bullish for U.S. equities because more buyers will lift prices, according to Paul Zemsky, head of asset allocation for ING Investment Management, which oversees about $180 billion, including portfolios that invest in both stocks and bonds.

“Investors moving money into these funds does lead to money going into the equity market in total,” he said. “A lot of this money will actually be long money,” Mr. Zemsky said. “I'm pretty optimistic on the flows continuing into these categories.”

“If you're not comfortable with moving all into equities and you still feel some pain from 2008, do you want to dip your toe in?” asked Wayne Lin, a money manager who manages only hybrid funds at Baltimore-based Legg Mason Inc., which oversees about $661 billion.

“The easiest way to do that is put it into a balanced fund or a fund that has dynamic allocation.”


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