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U.S. investors shift back to stock funds -- and domestic over foreign

February 2, 2011 |  1:45 pm

A surge of cash into U.S. stock mutual funds shows that more individual investors are betting that the equity bull market has further to run.

At the same time, Americans now think the grass is greener at home: For the first time since 2009 they’re pumping far more money into domestic stock funds than foreign stock funds.

Domestic equity funds had a total net cash inflow of $3.25 billion in the seven days ended Jan. 26, the third straight weekly inflow exceeding $3 billion, according to data Wednesday from the Investment Company Institute.

Usflag That’s a big change of heart by investors. In the second half of 2010 they were pulling money out of domestic stock funds at a rate averaging $11.3 billion a month.

Fund net cash flows measure new purchases minus redemptions, so an increase in inflows can mean more buying, less selling, or a combination of the two.

The other change of heart: Americans are favoring domestic funds over foreign funds, reversing a trend in place since August 2009.

Foreign stock funds took in a net $1.87 billion in the seven days ended Jan. 26, the third straight week that they’ve gotten less new cash than domestic funds.

The last time domestic funds won that race was in spring 2009 -- just as stocks were beginning to rebound from 12-year lows. But by August of that year many investors turned negative on domestic stock funds, which began to suffer persistent weekly net cash outflows. By contrast, for nearly all of 2009 and 2010 Americans remained buyers of foreign funds, particularly emerging-market funds.

In December of last year foreign funds took in $13.7 billion while domestic funds saw a net outflow of $12.8 billion.

Why the shift now back to domestic stocks and away from foreign stocks?

As I wrote in this story on Tuesday:

… Turmoil in Egypt and other emerging markets may be dulling their appeal for U.S. individual investors who have shoveled record sums into those markets over the last decade.

Edward Yardeni, head of investment research firm Yardeni Research in New York, said he was advising that "U.S. and European investors who have been focusing on a 'go global' theme should consider a 'come home' rebalancing of their portfolio" to reduce risk.

The Egyptian stock market is down 18% year to date, India is off 12%, Indonesia is down 6%, Brazil is off 4% and China's Shanghai composite stock index is flat.

The average emerging-markets stock fund is down 1.8% year to date, according to Morningstar Inc. By contrast, most domestic stock funds are up 2.5% to 4% this year.

European stocks have mostly posted bigger gains than U.S. stocks this year, but many European markets were hit hard in 2010 by fallout from the continent’s government-debt crisis.

-- Tom Petruno