Investors sour on Asian funds, seek safety

Analysis |

Investors are looking for safety and returns wherever possible, as most stock categories continue to decline and inflation fears grow.

Based on second-quarter mutual fund flows, Asian funds lost favor while government bonds remained popular, according to Morningstar.

Funds that invest in Asia, in favor for years as Chinese and Indian markets boomed, saw some investors flee following plunges.

The Chinese market lost 47 percent year-to-date, while the Indian market shed 38 percent, both on slower growth expectations and inflation worries.

Short-term bond funds, which invest mostly in investment-grade U.S. bonds with durations of less than a year, saw the biggest outflows among 68 Morningstar fund categories.

Christine Benz, Morningstar's director of personal finance, says that's due to huge losses in some popular funds, which left investors sour on the category.

Schwab Yield Plus Investor (SWYPX), with $604 million in assets, is down about 29 percent year-to-date, largely due to bad mortgage-related bets, she says. Fidelity Ultra-Short Bond (FUSFX) lost about 7 percent.

"Some investors have been using them more or less as money market substitutes, and were certainly not anticipating losses anything like we've seen," says Benz.

Not surprisingly, investors seeking safety and yield amid an unsteady economic climate flocked to funds that hold long-term Treasurys.

Latin American funds also drew flows.

That region has performed better than almost all other categories, due to soaring natural-resources prices.

Lipper senior fund analyst Tom Roseen says investors could be turning to alternatives like long-short and real-estate funds. Many real-estate funds invest in commercial real estate, which has not been as hard-hit as the residential arena, he adds.

Looking ahead, Roseen expects another tumultuous quarter, as financials finish writing down credit losses and consumers continue to cut back on spending.