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Morningstar Minute: Fund Flows a Good Guideline for Risk

As asset flows into equity funds continue to surge, it can be a gauge of performance chasing or risk investors are taking on right now.

The Morningstar Minute is our quick take on investments, the market, economic indicators, and more. Join us every day for fresh insights from our analyst team.

Shannon Zimmerman: Fund flows are estimates of the money that investors are sending into mutual funds to invest in the funds or are redeeming in the form of cashing out the shares that they have. You can learn a lot from fund flows in terms of investors' appetite for risk. And 2013 was a remarkable year for fund flows, a record-setting year on a worldwide basis and also here just in the U.S.

And what we learned is that, in the fifth year of a rally and a remarkable year in 2013, investors' appetite for risk really did perk up. In the early stages of the rally and until last year as a matter of fact, bond funds were favored over equity funds, but that wasn't the case last year.

In 2014 the trend has continued both in terms of flows being strongly positive into funds and investors favoring equity funds. On the U.S. side, we have seen about $90 billion into funds broadly, with about $30 billion of that going just to the international categories, primarily foreign large-blend funds.

Bond funds has been positive, as well, but not nearly so much so as they have been in years past. It really has been a reversal of fortune between bond vehicles and equity vehicles. And so, even though bond funds have seen about $17 billion overall in flows so far this year, $15 billion of that into taxable, $2 billion of that into muni bonds, it really is a small pittance of what the bond funds had enjoyed over the last three or four years.

It's not always a contrarian indicator when investors stampede into risk assets, like they are into equity funds right now. But five years into a rally, they don't call it performance chasing for nothing.