Nervous investors have been moving their money around during a difficult 2008 that has supplied more punishment than reward.
There is cold money: Nearly $26 billion in investor dollars flowed out of U.S. diversified equity funds in the first half of the year, according to Lipper Inc.
There is hot money: About $47 billion flowed into mixed-asset funds, whose portfolios include both stocks and bonds, during that time. Another $17 billion was added to world stock funds.
With many investors playing it safe while awaiting positive signs, money-market funds gained $192 billion in assets.
"There has been some performance chasing, as we see from continued flows into international funds," said Tom Roseen, senior research analyst with Lipper. "Within the stock funds, large caps continue to be the pariahs of the capitalization groups, though small caps recently have also felt the squeeze."
Much of the increase in mixed-asset funds is because of the rising popularity of so-called target-date funds that automatically reset their asset mix as they aim toward a future goal such as retirement, Roseen said. Target-date funds have been increasingly used in company 401(k) retirement plans.
Going with the flow is often not the right decision.
"Fund outflows are a reactionary move on the part of investors, who are far more pessimistic about the future of the stock market than they should be," said Jack Bowers, editor of the independent Fidelity Monitor newsletter. "Their pessimism is, however, creating some nice opportunities in the market."
The current investment environment is not unlike the early 1980s, when many people were pessimistic about stocks and moved money out of them, Bowers said. That trend continued for years, and it is not inconceivable the same malaise could set in again, he said.
Which leads to the question: Do all those outflows indicate investors are being wise with their money or instead signify that they're making some dumb moves?
"Net outflow numbers are a contrary indicator, so it's closer to dumbness," said Russel Kinnel, director of mutual fund research for Morningstar Inc. "People's emotions lead them to make illogical and unwise investment decisions, and usually the biggest reaction to bad news is selling."
Fund flows tell you where the market has been in the past 12 to 24 months, with just about all the inflows going to funds that have strong one- and two-year returns, Kinnel said. Active investors shifting money around are often doing their driving in the rearview mirror.
"Fortunately, the vast majority of investors are doing nothing, or very little, which is probably good," said Kinnel, noting that the movement of billions of dollars in the context of the trillions of dollars invested in mutual funds overall should not be overemphasized.
Kinnel sees some worthy funds among those that have suffered outflows.
He particularly likes American Funds Washington Mutual (AWSHX), which has suffered outflows of $3 billion this year, or 4 percent of total assets. It is down 8 percent over the past 12 months, with a three-year annualized return of 4 percent and five-year annualized return of 7 percent.
Run by an experienced team of managers, American Funds Washington Mutual is diversified in stocks and industry sectors. By continuing a long-term philosophy of selecting companies financially sound enough to pay a dividend in nine of the past 10 years, it found itself out of step when the market leaders were firms carrying more debt.
The fund's largest stock holdings are Chevron Corp., AT&T Inc., General Electric Co., IBM Corp., Exelon Corp., ExxonMobil Corp., Verizon Communications Inc., UPS Inc., Merck & Co. Inc. and Abbott Laboratories. It requires a 5.75 percent "load" (sales charge) and $250 minimum initial investment.
Additional funds that lost significant assets but retain solid potential, Kinnel said, are Legg Mason Value Fund (LMVTX), American Funds Investment Co. of America fund (ICAFX) and Fidelity Dividend Growth Fund (FDGFX).
Bowers' monitoring of fund flows indicates that investors should now be able to benefit from high-income funds. He has rearranged his model portfolios accordingly.
A favorite choice of his is Fidelity Strategic Income Fund (FSICX), a no-load fund with $2,500 minimum initial investment, which has a one-year annualized return of 5 percent, three-year annualized return of 5 percent and five-year annualized return of 7 percent.
Its multi-sector bond portfolio includes U.S. Treasuries; government and corporate bonds; foreign government and corporate bonds; and some mortgage securities. Fidelity Strategic Income has limited its risk by holding only modest stakes in high-yield bonds and emerging-markets debt, unlike many peers that were much more aggressive. It also benefits from Fidelity's huge research team that analyzes debt issues.
Though the move into energy and commodity funds has now slowed, Bowers is sticking with them and remains confident they'll pay off over a five-year period. He has kept Fidelity Select Natural Resources Fund (FNARX) in his model portfolios.
Past market downturns underscored the fact that keeping most of your assets where they are is often a smart decision.
"Simply sticking with a good asset allocation scheme and rebalancing your portfolio on a regular basis forces an investor to buy low and sell high, which should be the general goal for all investors," Roseen said. "Because if all investors were great market timers, we'd all be rich."