Heralded 'rotation' has no spin

The much-ballyhooed great rotation out of fixed-income assets and into riskier U.S. equities has yet to live up to its billing. After a month of record inflows ($86 billion) to open-end mutual funds in January, investors last month continued to put money into the markets — a still strong $52 billion, according to Morningstar Inc.'s flow data. But they aren't rotating into U.S. equities with any conviction. After investors plowed more than $15 billion into U.S. stock funds in January — perhaps the first indication of a rotation out of low-yielding bonds and into arguably undervalued stocks — the flow dipped to just below $2 billion in February. That is a reversal from the outflows those funds experienced for all of last year, but not a very big one. “We're just not seeing the great rotation,” said Morningstar fund analyst Michael Rawson. “In January, there were massive flows going everywhere. That moderated in February, but not much of it is going into U.S. equities.” Where it's going is into international stocks. Investors put $16.5 billion into the international stock fund category in February, with the diversified emerging-markets subcategory being the single most popular area ($6.2 billion in inflows). The international stock category took in just under $35 billion in the first two months of 2013 — one reason some emerging-markets-equity funds are closing to new investors. Investors also appear to be looking to take on more risk, not with stocks but with their fixed-income investments. Another $18.6 billion flowed into taxable-bond funds, but the lion's share of it went into nontraditional and potentially more risky sectors of the market. The three leading fixed-income subcategories in terms of flows last month were bank loan, nontraditional-bond and world bond funds — all of which attracted more than $5 billion in inflows. The intermediate-bond-fund category, which has attracted hundreds of billions in inflows over the past few years, took in less than $2 billion in February; intermediate government bond funds saw $2.4 billion in outflows.

TAKING ON MORE RISK

“Within fixed income, investors are withdrawing from the safer assets and putting money into traditionally more risky areas,” Mr. Rawson said. “Of course, in this environment [with the potential of rising rates], they may not necessarily be riskier.” “I expect over the next three years to see more money going into stocks, but for now, the great rotation is a straw man,” Mr. Rawson said. “It's a concept that people are talking about, but we're not yet seeing.”