Investors -- institutional and individual -- continue to be cautious, favoring conservative funds within the equities area and favoring debt over riskier investments. But any sense of serious worry among investors seems to be waning.

That is the general conclusion of three Lipper senior analysts in their latest report on fund flows and performance in the second quarter of 2011.

"People are worried about the Fed ending its $600-billion QE2 bond repurchase program and they’re worried about the Greek debt crisis,” said Lipper senior analyst Tom Roseen, research manager at Lipper. "They’re worried that personal income and consumption figures in May were softer than anticipated, and they’re worried that the Fed’s outlook. Saying that, some problems might not be temporary.” 

But at the same time, Roseen said, Lipper’s analysts acknowledge that the earnings outlook for companies is good.  "Going forward, I’m going to be looking for those earnings report,” he said, “and also for the next Institute of Supply Management figures, the employment figures and retail sales figures.”

Lipper fixed income analyst Jeff Tjornehoj, cautions that one effect of the Fed ending its QE2 program at the end of this month could be that it would no longer be “crowding out” private investors from the Treasuries market and that this would lead to more shifting of investment away from equities and into debt markets.

The Lipper second-quarter report found that equity funds as a whole lost 3.16% through June 27, marking it their worst performance since the same quarter last year. Among equities, they found that global health care and health care funds were the top performers, gaining 5.37% and 4.83% respectively, while global natural resources, gold and natural resources funds did the worst, losing 10.28%, 9.72% and 9.39%, respectively, over the period.

Not surprisingly, Lipper analyst Matthew Lemieux reported that health/biotech sector funds were among the leaders in fund inflows (+$1.3 billion), along with more conservative equities funds such as equity income (+$4.4 billion), multi-cap core (+$3.0 billion) and equity market neutral funds (+$1.4 billion). Big net losers were large-cap core (-$9.5 billion), multi-cap value (-$4.0 billion) and large-cap value (-$1.4 billion).

Overall U.S. diversified equities funds saw a net outflow in the second quarter of $4.9 billion. That compared to a net inflow into taxable fixed income of $43.2 billion.

Municipal bonds, which Lemieux said were recovering from a nasty first quarter, only saw an outflow of $4.6 billion in the second quarter.

"Munis are a big story in the second quarter," Lemieux said. "After 29 consecutive months of outflows and a total outflow of $49 billion, muni funds have seen 12 weeks of positive returns and two weeks on inflows.”

In the debt area, it's high current yield funds that have seen outflows, losing a net $13 billion in investor capital. The big gainers among bond funds over the quarter were loan participation funds (+$8.2 billion), multi-sector income funds (+6.9 billion), global income funds (+6.6 billion) and intermediate investment grade funds (+$5.7 billion). 

Top net outflows were experienced by high current yield funds (-$1.3 billion), short U.S. government funds (-1.3 billion), GNMA funds (-$0.9 billion) and U.S. government bond funds (-$400 million).