Government bond funds, emerging market equity funds lose favor

Examining fund flows

Money, tornado Money, tornado

With the summer holidays largely behind and key European Central Bank and US Federal Reserve meeting ahead, investors spent the first five days of September chasing yield, re-positioning their fixed income allocations for a further round of quantitative easing in the US and responding to the latest export numbers from Asia. Those numbers show exports to the European Union down some 15% year-on-year in July and, within the region, shipments to China off as much as 12% in the case of Japan.

Against this backdrop investors pulled more than $1 billion from government bond funds across all durations and EPFR Global-tracked Asia ex-Japan Equity Funds posted their biggest weekly outflows since late 4Q11. Redemptions from Taiwan and India Equity Funds hit their highest level in over a year and Japan Equity funds posted outflows for the third straight week.

Overall, all EPFR Global-tracked Equity Funds surrendered a net $9.9 billion during the week ending Sept. 5, with Emerging Markets Equity Funds accounting for $1.8 billion of that total, while Bond Funds absorbed $3.19 billion and Money Market Funds $4.6 billion.

Expectations that the ECB and the Federal Reserve will deliver further quantitative easing in the coming weeks helped Europe Bond Funds post their biggest inflow in 13 weeks, accelerated the recent outflows from US Government Bond Funds and sustained investor appetite for riskier, more rewarding asset classes such as emerging markets and high yield debt.

Emerging Market Equity Fund Flows
The first week of September saw a five week inflow streak for Emerging Market Equity Funds come to an end as investors looked at the impact of Europe’s economic woes and China’s slowing economy on emerging markets exporters, especially those located in Asia. Redemptions from Asia ex-Japan Equity Funds hit a 37 week high, Latin America Equity Funds posted outflows for the ninth time in the past 11 weeks and the diversified Global Emerging Markets (GEM) Equity Funds’ six week inflow streak was snapped.

Outflows from Asia ex-Japan Equity Funds were paced by redemptions from China, India and Taiwan Equity Funds, all of which surrendered over $300 million during the week ending Sept. 5. Reasons to sell during this period ranged from the vague nature of Chinese plans to bolster growth through the poor short term outlook for exporters to Taiwan’s unappealing combination of slowing growth and inflation at a four year high.

Latin America is also feeling the effects of Europe’s slowdown, with Brazil’s 1H12 exports to the region down some 8% y-o-y. Investors remain wary of the region’s dependence on commodity exports and its willingness to pursue interventionist economic policies that include capital and price controls, selective import tariffs and the nationalization of foreign owned companies. Year-to-date outflows from Latin America Equity Funds now stand at $3.1 billion versus outflows of $7.35 billion during the comparable period last year.

Investors are also showing little affection for the major emerging markets themes. Dedicated BRIC (Brazil, Russia, India and China) Equity Funds have posted outflows every week since mid-March while Frontier Markets Funds and funds under the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Thailand and South Africa) umbrella have experienced redemptions eight and seven of the 10 weeks quarter-to-date. The recent surge of interest in the latest entrant to the list of EM themes, the MIST (Mexico, Indonesia, South Korea and Turkey) markets, ended in early September.

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