Fair-weather funds forsake fixed income

Encouraged by stock market returns for 2012, equity investors are in a risk-on mode as they move their money out of bonds and into stocks.

In the U.S., investors bought $1.8 billion worth of mutual funds and ETFs in the first week of 2013.

The shift, dubbed by market watchers the “great rotation,” reverses a trend that was triggered by the 2008 financial crisis when nervous investors started to pick the safety of bonds over the whims of stock markets.

There are multiple factors that support equity investment, but none more compelling than attractive valuations and poor long-term returns from government bonds.

As well, ultra-low yields on investment grade and high-yield bonds have pushed investors further away from fixed-income and towards stocks.

Some market observers, though, have been advising investors against rushing to make the switch. They argue that those who’re using higher dividends as the reason to ditch low-yielding government and corporate bonds are not comparing like with like.

Ultimately, as this report in The Wall Street Journal suggests, whether or not funds are going to continue to flow from bonds to equities will depend on such indicators as the unemployment rate, returns from fixed-income investments, and the length of the U.S. Federal Reserve’s bond-buying program.

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