In the past three years, bond funds have been raking in the assets.
Funds that invest in stocks have taken it on the chin, almost without relent. This year, $59.0 billion has been pulled out of stock funds. Since the start of 2007, more than half a trillion dollars has been pulled from domestic stock funds, including roughly $26 billion in September, according to the Investment Company Institute.
But should it be so? Probably not.
"What you have is a fairly unusual disconnect between returns and flows,'' says Morningstar mutual fund research director Russ Kinnel. "Historically, you can look at the past year or two of returns and that is going to tell you where the flows are going to go.''
Not so with stock funds.
The most direct twin to funds that invest in interest-bearing bonds are funds that invest in dividend-paying stocks.
In 2009, bond funds produced an average return of 16.7%, according to Morningstar. Dividend-paying stocks? An average of 25.3%.
Bond funds have not come close, since. In 2010, the average bond fund return was 5.9%. In 2011, 6.4%. This year, so far, 6.5%.
Fund clients would have been much better served if they were pushed into funds that focused on dividend-paying stocks.
Funds that invested in dividend payors had an average return of 25.2% in 2009. In 2010, 14.7%. The 2011 year was the only clunker at 1.9%. This year? Up 11.95% so far.
Bond funds should be so generous.
But dividends may not be the key to the success of funds that invest in dividend-paying stocks.
In fact, the numbers indicate that stocks that appreciate do just as well as dividend-paying stocks.