Bonds take the lead

Six months of money flow numbers don’t lie. Bond funds are running circles around stock mutual funds week after week and month after month when it comes to attracting new money from investors, routinely pulling in at least twice as much as stock funds in weekly estimates published by the Investment Company Institute, the mutual fund industry’s trade association. Fund sales usually work the other way around.

Common sense can explain a lot of that. But some of the numbers may suggest something important and long-lasting.

Start with the obvious: Investors got clobbered in stock funds last year and understandably flinch at the thought of putting new money into equities. Stock funds attracted money at times this year, but in terms of investor cash flow, they just about broke even during the first six months of 2009, according to the ICI data through May and estimates for June. The actual math works out to a small net outflow of $579 million.

The natural refuge for skittish investors and their cash, money market funds, offer a terrible alternative this year. For starters, the experience of 2008 taught investors that money funds weren’t quite as safe as they were once thought to be. Besides, money fund yields are dreadful this year, ranging between 0.25 percent and 0.5 percent at the moment.

That puts bond funds comfortably in the middle. They offer greater safety to stock investors prepared to accept limited returns. They provide better yields to money market shareholders willing to take a little more risk.

The results speak for themselves: Bond funds have pulled in about $149 billion through the first half of the year, by the ICI’s count. In 2007, a pretty good year for bonds, those funds raked in $108 billion over 12 months.

A lot of the movement into bonds, and investor ambivalence toward stocks, is exactly what you would expect in the kind of investment cycle we’re struggling through today. But there are other factors at work now. They favor a greater mix of bonds in investment portfolios and could influence markets for years to come.

One is simple demographics. As the investing population grows older, it is likely to own more bonds and fewer stocks. Some market analysts says older investors need to own more stocks to avoid outliving their retirement assets, but there’s no mistaking the connection between an aging population and the lower risk profile of bonds.

Another factor is psychological, and it has to do with investors getting hit over the head with two terrible stock market declines in one decade. At some point, the idea of buying stocks on the price dips doesn’t sound as appealing as it did years earlier.

The trend toward more conservative investing may have started well before this year, according to Brian Reid, the ICI’s chief economist. He noted investors who buy bond funds during a bear market usually change gears as the economy recovers and interest rates start to rise.

But that didn’t happen after the sharp market decline at the start of this decade. That time, investors held on to more of their bond fund shares, in what may have signaled an attitude shift away from risk. “We continued to see fairly strong inflows that ran counter to the historical experience,’’ says Reid.

Perhaps that will happen again. The trend for bond funds may be influenced more than usual by the direction of the economy.

A tepid recovery and slow growth will limit the appeal of stocks and help bonds remain attractive. A return to high inflation would drive down the value of bonds and make them less attractive.

For now, bond mutual funds are the products investors want.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.