May Fund Flows: ‘Prelude to the Storm,’ Says Morningstar

Morningstar said Tuesday that May was another strong month of mutual fund inflows: Investors added $38.6 billion into long-term funds, excluding figures for money-market and fund of funds, as well as ETFs.

Taxable-bond funds stayed ahead of the pack with $21 billion in flows.

Investors, who embraced core, intermediate-term bond funds in 2012, are increasingly turning to less interest-rate-sensitive bond sectors and are shunning government bond sectors, according to Michael Rawson, CFA.

In May, interest rates spiked, with the 10-year Treasury rate increasing by nearly half a percent to 2.16%. At the same time, the Barclays Aggregate Bond Index fell 1.78%.

Investors took profits in U.S. equity funds in May “but continued their love affair with emerging-markets stocks,” says Rawson.

Municipal-bond funds experienced net outflows for the third month in a row. Meanwhile, money-market funds (also tracked by Morningstar) grew by $27 billion—their first monthly inflow of 2013.

Darkening Skies

In May, the improving economy and jobs report led to the conclusion that the Fed may ease up on quantitative-easing measures. Flows into the intermediate-term bond category weakened but were positive for the month—and did not turn negative until early June.

In May, it was nontraditional-bond and bank-loan funds that took in the largest share of flows, according to Morningstar.

The PIMCO Total Return Bond had strong outflows. But PIMCO Unconstrained, the largest fund in the nontraditional category, gained more than $1 billion in flows, as did JP Morgan Strategic Income Opportunities.

The bank-loan category also attracted strong inflows, led by Oppenheimer Senior Floating Rate with a $700 million haul. (The fund rose 0.24% in May and 3.54% during the first five months of 2013.

Equity Tremors

The rise in rates did not sit well with equity investors in May.

“While the S&P 500 was up 2.34% for the month, yield-oriented sectors such as REITs and utilities each lost more than 6%, according to Morningstar sector indexes,” Rawson said.

U.S. equity fund investors took out a net $700 million in May, including withdrawals of $1.9 billion from large-growth funds.

On the other hand, international-equity funds gained $8.5 billion, with diversified emerging-markets funds leading the way.

A new fund, ING Emerging Markets Index, “burst onto the scene” with $470 million of inflows in May, says Morningstar. Meanwhile the Vanguard Emerging Markets Stock Index brought in $363 million.

International funds that each brought in more than $1 billion included the Silver-rated GMO International Intrinsic Value and Gold-rated Oakmark International.

(Oakmark International has gained 45% in the past 12 months compared with 28% for the MSCI EAFE Index.)

Fund Family Winners

Vanguard led the pack again, with more than $11 billion in flows.

In May, the fund giant officially launched two international bond funds: the Vanguard Total International Bond Index Fund and Vanguard Emerging Markets Government Bond Index Fund, which didn’t officially start trading until June 4. PIMCO stayed in second place, though its $2.5 billion of flows was its weakest showing for the year to date, Morningstar reports.

Franklin Templeton was close behind PIMCO, adding more than $2 billion; its Templeton Global Bond Fund led the way. Fidelity came in fourth, thanks to strong flows into the Fidelity Series Investment Grade Bond and Strategic Advisers Core Income.

“For the second month in a row, flows to MFS were lifted by a strong interest in Bronze-rated MFS Massachusetts Investors Trust,” said Rawson.

Hartford, Janus and Columbia, however, each had strong outflows.

The Silver-rated Hartford Capital Appreciation saw redemptions of $1.4 billion, while Neutral-rated Janus Fund saw outflows of $481 million.

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Bull of the Day: Ruckus Wireless (RKUS) - Bull of the Day

Ruckus Wireless (RKUS) didn't make enough noise when it came public, and the noise it has created at earnings hasn't exactly been music to investors ears. Still, it is a Zacks Rank #2 (Buy). It is the Bull of the Day.Making a ConnectionRecently, analysts are both Deutsche Bank and William Blair noted that the WLAN space was seeing some positive purchasing trends. The idea of constrained IT budgets did not come up nor did customers waiting for the latest and greatest technology.With the way things are going, investors who are looking at the long term might even see a budget flush at the end of this year. The budget flush happens when a business manager spends all available budget all at once to make sure that next year they get an equal amount of budget or more depending on success.Company DescriptionRuckus Wireless provides Wi-Fi solutions. The company offers SmartCell Gateway, a platform to support and manage its Smart Wi-Fi access points as well as for the integration of Wi-Fi and other services into service provider network infrastructure. The company was incorporated in 2002 and is headquartered in Sunnyvale, California.Earnings HistoryLooking to the earnings history, we have a limited data set with only two reports. Worse than having limited data is when they are both misses!The most recent quarter was expected to show a gain of $0.03, but was instead a break even quarter. That miss of $0.03 helped push the stock lower by 22% in the session following the earnings release.IPO Had Access DeniedNot too long ago, RKUS came public and had a major flop of an IPO. The stock was offered at $15 and raised $126 million for the company, but closed down 18% to $12.25 on its first day of trading. Since then, the stock seemed to have a stronger signal for investors.The stock ran to highs of $26 and change before losing the signal again with investors. Now back in the low teens, many are banking on a strong second half for the telco and telco equipment providers to boost shares back to all-time h! ighs.Earnings Estimates AdjustedAfter its recent IPO analysts have had a chance to fine tune their estimates. The 2013 Zacks Consensus has been trimmed from $0.16 to a nickel. At the same time the 2014 Zacks Consensus Estimate has dropped from $0.30 in January of this year to the current level of $0.16. Analysts often have trouble with a new company that does not have a full year of data available to discern trends. This is likely the case for RKUS, but the new, lower bar means the company has a much better chance of beating the number. ValuationThe valuation picture for RKUS is a stiff one. This is often the case for a stock that is fresh off an IPO with only two quarters behind it. With minimal earnings at present the 45x trailing PE doesn't seem to really be a fair comparison to the 12x industry average. Similarly, a 304x forward PE seems to be more of a data error than a basis for an investment decision. At the same time, a 250% growth in earnings from 2013 to 2014 works to level the absurd PE ratios. The Chart The chart on this stock is one that doesn't scream a Zacks Rank #2 (Buy). Instead it looks like one of those stocks that got ahead of itself and has later corrected. Taking advantage of the correction is one thing that I suggest investors look into as the stock bottomed in June and is on the rise. I am very positive on the whole telco equipment space after companies like GOOG and MSFT recently missed earnings. The likelihood of a flood of wearable devices coming in 4Q is pretty high, and all of them will need wireless connections... and playing a basket of wireless equipment stocks makes a lot of sense right here. Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio.Brian is also the editor of Breakout Growth Trader a trading service that ! focuses o! n small cap stocks and also carries a risk limiting strategy. Subscribers get daily emails along with buy, and sell alerts.Follow Brian Bolan on twitter at @BBolan1Like Brian Bolan on Facebook