Expectations that both the US and European Union will grow faster than expected during 1H11 helped the recent rotation from emerging markets to develop markets equity funds move up a gear in late January. EPFR Global-tracked Emerging Markets Equity Funds posted their first outflow in five weeks and their biggest outflow since early 3Q08 during the week ending January 26 while Developed Markets Equity Funds took in fresh money for the seventh time in the past eight weeks. Flows into Japan and Europe Equity Funds hit 43 and 34 week highs respectively while the diversified Global Emerging Markets (GEM) Equity Funds had their worst week in nearly three years.
The optimism about US growth prospects did not extend to US Municipal Bond Funds, which suffered redemptions in excess of $1 billion for the seventh straight week, and Europe Bond Funds remained under pressure. But overall flows into EPFR Global-tracked bond funds were positive, running around two-thirds of the $2.72 billion absorbed by equity funds. Outflows from Money Market Funds totaled $6.9 billion for the week.
Emerging Market Equity Fund Flows
High valuations, inflationary pressures, moves towards capital controls, renewed attention being paid to political risk and the weakness of the US dollar have all weighed on emerging markets in recent weeks. During the fourth week of January those elements combined to chase over $3 billion out of EPFR Global-tracked GEM, Asia ex-Japan and Latin America Equity Funds. Only EMEA Equity Funds, anchored by interest in Russia ’s still cheap commodities story and Africa ’s relatively uncorrelated growth, managed to take in fresh money.
Outflows from Asia ex-Japan Equity Funds climbed to a 37 week high with political tensions in Thailand, inflationary pressures in China and India, the sharp correction experienced by Indonesia’s equity market and bearish sentiment toward the US dollar all taking their toll. China Equity Funds recorded their biggest weekly redemptions since the second week of May ahead of the lengthy New Year holidays and Indonesia Equity Funds suffered their largest outflow in over a decade.
Inflation is also a major concern for investors in Latin America, with Venezuela and Argentina both having rates estimated – unofficially in Argentina’s case – at over 20% and Brazil’s rate creeping up. Latin America Equity Funds posted outflows for the fifth time in the past seven weeks, with investors looking for exposure to the region gravitating towards Chile Equity Funds.
Flows into EMEA Equity Funds were again driven by investor appetite for exposure to Russia and Africa, with Russia Equity Funds posting inflows for the 19th time in the past 20 weeks and Africa Regional Funds for the 75th time in the past 78 weeks.
US, Global, Europe , Pacific and Japan Equity Fund Flows
For the second week running all five of the major EPFR Global-tracked Developed Markets Equity Funds attracted fresh money, helped in part by the return of retail investors who bailed out of these fund groups for much of last year.
The one developed markets fund group that retail investors continue to steer clear of, Europe Equity Funds, absorbed over $1 billion for the first time since early June as better than expected macroeconomic data has encouraged investors to reassess the region’s prospects. Although inflows again favored Germany Equity Funds, both Europe Regional and UK Equity Funds posted solid inflows during the week ending Jan. 26.
Although the weaker dollar remains an issue for Japanese exporters and the recent downgrading of Japanese debt reinforced the case for tighter long-term fiscal and monetary polices, investors opted to focus on the rebound in capital expenditures and exports that are expected later this year. Japan Equity Funds took in fresh money for the eighth week in a row as year-to-date inflows climbed over the $1.5 billion mark.
US Equity Funds, meanwhile, posted inflows for the seventh time in the past eight weeks as commitments from retail investors hit their highest level since late 3Q09. Flows favored funds managed for Value – which outperformed their Growth counterparts across all capitalizations – and the share of fresh money attributable to actively managed funds climbed to around 62% of the total.
Both of the major geographically diversified developed market equity fund groups, Global and Pacific Equity Funds, posted inflows that extending their current inflow streaks to four straight weeks.
Renewed faith in US prospects translated into a rough week for EPFR Global-tracked Commodity Sector Funds as investors who had sought the security of gold and precious metals cashed in their gains and went looking for riskier, more rewarding options. Outflows from these funds reached their highest weekly total on record despite the high prices being commanded by soft and industrial commodities, with tin the latest to see its price hit a fresh record high.
Year-to-date the two front runners are now Technology Sector Funds, which have taken in a net $1.76 billion, and Real Estate Sector Funds. The former have been buoyed by some robust 4Q10 earnings reports, the latter by the prospect of ultra-low interest rates continuing in many developed markets.
Accommodative interest rates have not been enough to offset some earnings disappointments in the financial sector, with Financial Sector Funds barely extending their current inflow streak to five straight weeks.
Speculation of a jump in oil supplies prompted investors to pull money out of Energy Sector Funds for the third time in the past five weeks. Healthcare/Biotechnology Sector Funds also posted modest outflows as the Republican-controlled House of Representatives took aim at the healthcare reform package passed last year.
Bond Fund Flows
Investors maintained their aversion to US municipal and peripheral Eurozone debt during the fourth week of February. But four of the five major bond fund groups, including US Bond Funds, managed to take in fresh money with High Yield Bond Funds narrowly missing a fourth straight week of $1 billion plus inflows and Emerging Markets Bond Funds extending their winning run to seven straight weeks.
Although US Municipal Bond Funds recorded outflows for the 11th consecutive week, the pace of redemptions by institutional investors slowed and the outflows were more than offset by flows into Floating Rate, Short Term and Total Return Bond Funds. Flows into the latter sub-group hit a 15-week high.
Europe Bond Funds, meanwhile, have now posted outflows of close to $7 billion over the past 15 weeks. Fear that impending elections in Ireland will produce a government with a mandate to force some of the costs of its sovereign debt crisis on bond holders was the catalyst for the latest redemptions.
Flows into Emerging Markets Bond Funds continue to favor funds with local currency mandates. Funds focusing on Asia continue to fare best among the regional funds while those dedicated to EMEA debt are in negative territory YTD.
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EPFR Global, a subsidiary of Informa plc (LSE: INF), provides fund flows and asset allocation data to financial institutions around the world. Tracking both traditional and alternative funds domiciled globally with $14 trillion in total assets, we deliver a complete picture of institutional and individual investor flows and fund manager allocations driving global markets. Our market moving data services include daily, weekly and monthly equity and fixed income fund flows and monthly fund allocations by country, sector and security.