Government bond funds, emerging market equity funds lose favor

Examining fund flows

Developed Market Equity Fund Flows
Developed markets investors returned from their summer vacations in a show-me-the-money frame of mind when it came to the quantitative easing expected -- and flagged -- by the ECB and US Federal Reserve. In the week before the ECB’s Sept. 6 meeting EPFR Global-tracked US Equity Funds experienced their second largest weekly redemption YTD and Europe Equity Funds recorded net outflows for the eighth time in the past nine weeks.

ECB President Mario Draghi gave markets at least some of what they were looking for on Sept. 6, announcing a program for buying the short-term sovereign debt of countries on the secondary market provided they accept as yet unspecified conditions. Most major European equity indexes ended the day up 2-3%. Daily data showed the pace of redemptions from Europe Equity Funds ebbing as the week progressed. "But we’ve been here before," observed Cameron Brandt, EPFR Global’s Director of Research. "Spain could easily puncture this bounce by digging in against the likely conditions."

US markets were also lifted by the ECB’s announcement. In the week leading up to it, however, US Equity Funds experienced net redemptions of over $8 billion driven by outflows from a handful of Large Cap ETFs. Retail investors continue to keep their distance: they were net redeemers from US Equity Funds overall for the 34th time in the 36 weeks YTD.

Japan Equity Funds, meanwhile, extended their longest outflow streak since the first quarter. Institutional flows into domestically domiciled ETFs did turn positive again, suggesting the Bank of Japan may be resuming its support of Japan’s equity markets.

The two major diversified developed markets fund groups reversed course again, with Global Equity Funds snapping a two week outflow streak while Pacific Equity Funds posted outflows for the first time in three weeks.

Sector Fund Flows
Expectations of quantitative easing continued to shape sector fund flows in early September. EPFR Global-tracked Commodities, Financial, Real Estate and Technology Sector Funds all posted inflows during the week ending Sept. 5 while several of the more defensive fund groups -- among them Consumer Goods and Telecoms Sector Funds -- recorded modest outflows.

Flows into Commodities Sector Funds exceeded $1 billion for the third week running. In contrast to the previous two weeks, flows moved beyond funds specializing in gold and precious metals. Ex-gold and precious metals Commodities Sector Funds posted their biggest weekly inflow since mid-April.

Financial and Real Estate Sector Funds continue to benefit from the prospect of more cheap money. Financial Sector Funds posted inflows for the sixth straight week, matching a previous streak that ended in early November, and remain the second best performer among the 11 major sector fund groups after Healthcare/Biotechnology Sector Funds.

Internal analysis by EPFR Global shows that overall, actively managed equity funds without a single sector focus are currently overweight the Consumer Staples and Discretionary, Information Technology and Industrials sectors while significantly underweight Energy, Financials and Telecoms.

Bond Fund Flows
Investors continued their year-long search for yield during the first week of September, a quest that saw them commit $1.6 billion to EPFR Global-tracked High Yield Bond Funds while pulling out over $1.5 billion for US Government Bond Funds. They also committed fresh money to Municipal and Mortgaged Backed Bond Funds for the 53rd and 77th consecutive week respectively and lifted YTD flows into Emerging Markets Bond Funds over the $32 billion mark.

Europe Bond Funds snapped their two week outflow streak ahead of Draghi’s announcement that the ECB is willing to extend strong -- albeit conditional support -- in the secondary market for Eurozone sovereign debt. The $289 million these funds took in represented a 13 week high. But UK Bond Funds extended their dismal run since 2Q12, posting outflows for the 13th time in the past 16 weeks.

High Yield, Municipal and Mortgaged Backed Funds again claimed a major share of the money committed to all US Bond Funds. There was also solid interest in Short Term (1-3 years duration) Bond Funds which took in over $700 million. Intermediate Government Bond Funds, meanwhile, saw redemptions hit their highest weekly total since EPFR Global started tracking this fund group in 1Q07.

Emerging Markets Bond Funds with a hard currency mandate again outgained their local currency counterparts, this time by a 7-to-1 margin, as investors look for higher returns while side-stepping the risks posed by inflation and the tendency of emerging markets exporters to try and weaken their currencies.

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About the Author

EPFR Global, a subsidiary of Informa plc (LSE: INF), provides fund flows and asset allocation data to financial institutions around the world. The company tracks both traditional and alternative funds domiciled globally with $17 trillion in total assets and delivers information on institutional and individual investor flows and fund manager allocations driving global markets.

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