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Stock Strategist Industry Reports

Investors Continue to Lighten Up on Equities as Market Rallies

While global equity markets have regained their footing, investors still prefer fixed income over equities, with outflows affecting both U.S. and international stock funds.

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While global equity markets have regained some of their footing during the third quarter, we don't believe this signals an end to market volatility. With Europe dealing with what has become an expanding debt crisis, most developed economies around the globe struggling to maintain any kind of positive momentum, and growth in emerging and developing markets like China and Brazil stumbling as a result, we don't see much that will change what has been a macro-driven market for investors. We believe that this ongoing volatility has caused investors to rapidly alter their risk tolerances and asset class preferences in response to short-term news and investment performance. As such, we favor the more broadly diversified asset management firms, especially those that offer a mix of active and passive strategies, strong equity and fixed-income franchises, and exposure to both domestic and international markets, during periods of market volatility. We continue to highlight the asset managers we cover that have solid exchange-traded fund platforms--like  BlackRock (BLK) and  Invesco (IVZ)--or strong international franchises--like  Franklin Resources (BEN)--which we think are much better positioned than their peers to hold on to assets in this more volatile market environment.

Outflows Continue for Actively Managed U.S. Stock Funds
Despite gains in the U.S. equity markets, as represented by the S&P 500 Index, during June (up 4.3%), July (up 1.0%), and August (up 2.3%), investors continued to pull money out of actively managed U.S. stock funds last month. This marks the 18th straight month of outflows from the category, leaving 2012 on pace to match the level of investor outflows that were recorded last year, which at $97 billion were second only to the nearly $115 billion that flowed out during 2008. We believe this is the most likely scenario for actively managed U.S. stock funds, given that flows for the category, according to data provided by Morningstar Direct, have been negative in the back half of each of the past six calendar years (with only two months popping up during that entire time--December 2006 and August 2008--where flows for actively managed U.S. stock funds were actually positive).

Greggory Warren does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.