Via Citi analysts Tobias Levkovich, Lorraine Schmitt and Christina Wood:

Equity mutual funds posted notable inflows of $18.11 billion in July and easily surpassed inflows of $59 million in the previous month and came in well above the 10-year July average of -$3.08 billion. International equity funds continued their momentum in July and recorded positive net inflows of $9.72 billion, and were up from inflows of $6.65 billion in June. Perhaps even more impressive, Domestic equity funds registered inflows of $8.39 billion and rebounded from outflows of $6.59 billion in June. For the first seven months of 2013, US oriented funds experienced a cumulative inflow of $15.54 billion, a turnaround from outflows of $61.71 billion in the first seven months of 2012 and compared favorably with exits of $155.97 billion and $132.46 billion recorded in 2012 and 2011, respectively. Thus far in 2013, total equity funds posted cumulative inflows of $94.52 billion, with flows continuing to be elevated by aggregated international flows of $78.98 billion year-to-date. Emerging market funds reported modest inflows of $1.95 billion in July, but edged up from the prior month’s inflow of $1.41 billion for a total of $25.40 billion garnered since the start of the year, nearly twice the inflows posted through July 2012.

Bond Funds Flow

Total bond funds saw their second consecutive month of outflows in July, coming in at -$16.70 billion and were markedly shy of their 10- year July average inflow of $9.39 billion. In the first seven months of 2013, bond funds witnessed inflows of only $16.84 billion, considerably less than 2012 YTD inflow of $177.31 billion. For the full-year of 2012, bond funds took in $303.60 billion, which were significantly higher than flows of $125.10 billion seen in 2011. Interestingly, high yield bond funds reported a monthly inflow of $4.32 billion, up sharply from outflows of $12.19 billion in June, but almost 20% worse than inflows of $5.20 billion in July 2012. Note that, 2012 inflows for high yield funds of $23.98 billion sharply outpaced 2011 inflows of $11.48 billion, thereby generating tough comps for 2013.

See: Traditional Funds Losing Ground To Alternatives

Total Bonds Funds Flow

Growth vs. Value funds flow

Growth mutual fund flows reported inflows of $6.44 billion in July, reversing outflows of $9.66 billion in June, and reducing the cumulative outflow year to date to $3.73 billion for growth funds. In comparison, value funds experienced modest inflows of $1.95 billion in July, well off June’s inflow of $3.07 billion, but comfortably better than July 2012’s outflow of $1.46 billon. Meanwhile, aggressive growth funds posted inflows of $1.67 billion, compared with June’s $710 million in redemptions and the prior year’s monthly exit of cash from such funds.

See: Fixed Income Mutual Funds Bounce Back After 7 Weeks Of Outflows

Money Market Funds

Total money market funds (both retail and institutional) posted inflows of $26.6 billion in July compared to outflows of $17.12 billion in June. Total money market fund assets ended July at $2.61 trillion and were marginally higher than the level of July 2012. Retail money market fund assets as a percent of the Wilshire declined to 5.14% in July versus 5.44% in June. Combined Mutual Funds and ETFs: July’s total equity inflow of $52.76 billion handily beat June’s outflow of $5.35 billion and was significantly stronger than inflows of $2.92 billion in July 2012. 2013 YTD total inflow of $185.82 billion continues to trump 2012’s YTD aggregate inflow of just $15.52 billion.

ETFs

Total stock ETFs experienced positive net issuance of $34.64 billion in July, surging from negative net issuance of $5.41 billion in June, marking the largest monthly inflow since September 2012. Domestic equity ETFs recorded positive net issuance of a $29.64 billion for the month, compared to positive net issuance of $5.0 billion for international ETFs. Thus far in 2013, cumulative equity ETFs totaled a positive net issuance $91.30 billion, versus a positive net issuance of $55.65 billion over the first seven months of 2012. Meanwhile, Domestic ETF 2013 YTD inflows have totaled $67.67 billion compared to international ETFs inflows of $23.63 billion. As such, more than 70% of aggregate equity flows showed up in US equities in July taking up year to date share of equity flows to near 45%, showing a growing preference for US stock market exposure.

See: US ETFs Surge In July, Accounting for 90 Percent of Industry Growth

Total Equity Funds flow

Outlook

We continue to contend that 2H13 may prove a bit more challenging for equities given optimistic back half Street EPS estimates that may need trimming, the impact of likely Fed tapering and a search for new sector leadership as well potential discord in Washington over budgets and the debt ceiling. While credit conditions remain favorable in the US, somewhat weaker emerging economies and a still soft Europe are holding back the hoped for second half market leadership handoff from US-oriented names to more global cyclical ones. The S&P 500 always was expected to overshoot our year-end 2013 target of 1,615, before slipping back in 2H13 a bit. Valuation remains attractive, while implied long-term earnings growth expectations have stayed subdued. Unfortunately, the Citi Economic Surprise Index has rolled over and limits that cyclical shift plausibility though buyback activity has stepped up and money has begun to flow into equity funds. Hence, the market may be range-bound until year-end, but the index could climb to 1,825 by mid-2014 as economic conditions improve next year amidst lowered expectations. Accordingly, we remain generally constructive with some nearer term caution.