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Bond fund inflows hit 18 month high while equity fund inflows solid

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Having digested forecasts for 2012 in which the phrase "muddle through" appeared early and often – especially in relation to the embattled Eurozone – investors piled into several major bond fund groups during the week ending 11 January.

Municipal Bond Funds posted their biggest weekly inflow in over two years, flows into Global Bond Funds hit a 31 week high, High Yield Bond Funds took in nearly USD2 billion and Europe Bond Funds snapped a 17 week losing run as EPFR Global-tracked Bond Funds collectively absorbed an 82 week high of USD6.39 billion. Equity Funds also absorbed over USD6 billion, with Emerging Market Equity Funds accounting for USD1.84 billion of the weekly total, as actively managed funds attracted fresh money for the first time since early November. Equity funds with a dividend focus extended an inflow streak that stretches back to early August: since the beginning of 2010 these funds have only posted outflows eight times in 106 weeks.

At the country level investors took another look at Asia and parts of the EMEA region, with Australia and Indonesia Equity Funds seeing strong inflows and EMEA Equity Funds posting inflows for the first time in 10 weeks.

Flows into Money Market Funds jumped to a five week high of USD15.8 billion, with Europe Money Market Funds accounting for close to 60% of that total.

Flows into EPFR Global-tracked Emerging Market Equity Funds jumped to a nine week high in early January as investors committed over USD1.85 billion to these funds.

The geographically diversified Global Emerging Markets (GEM) Equity Funds received about USD1.6 billion of the total while investors steered some fresh money to Asia ex-Japan and EMEA Equity Funds for the first time in nine and 10 weeks respectively.

Flows into Asia ex-Japan Equity Funds were helped by the continuing thaw in sentiment towards China, with China Equity Funds snapping an eight week outflow ahead of data showing inflation at a 15-month low while GDP growth remains north of 8%. Another strongly growing regional economy, Indonesia, also fared well as commitments to Indonesia Equity Funds hit their highest total since late 3Q10. But subdued earnings forecasts from US technology companies saw Taiwan and Korea Equity Funds post outflows, with the former seeing redemptions climb to a 15 week high.

EMEA Equity Funds were helped by renewed interest in Russia’s oil story as supplies from Iran and Nigeria are squeezed by sanctions and strikes. Some investors are also betting the protests against Prime Minister Vladimir Putin will translate into some modest economic and legal reforms later this year. The relatively calm opening round of elections in Egypt has contributed to a steady decline in redemptions from Middle East and Middle East and Africa Regional Equity Funds since they peaked in early December.

Investors did not warm to Latin America’s BRIC market, Brazil, with Brazil Equity Funds extending their current outflow streak to five weeks and USD742 million as a bounce in the country’s benchmark index triggered fresh redemptions.

The week ending 11 January saw developed markets investors again gravitating to the markets churning out reasonable macroeconomic numbers, a small club that includes the US, Australia and some Nordic countries. US Equity Funds accounted for the bulk of the fresh money taken in by EPFR Global-tracked Developed Equity Funds, absorbing over USD4 billion for the week, while flows into Australia Equity Funds hit their highest level in over 14 months.

Although sentiment towards Europe has thawed in recent weeks and key equity indexes hit five month highs in early January, Europe Equity Funds posted outflows for the ninth time in the past 10 weeks as data showed the region’s engine of growth, the German economy, stalling during 4Q11. During 2011 redemptions from regional funds were buffered by the over USD18 billion committed to Germany Equity Funds. But these funds have now posted outflows seven of the past 10 weeks.

Japan Equity Funds recorded outflows for the 10th time in the past 12 weeks as the strength of the Japanese yen, the weakness of European demand and the rapidly eroding popularity of the country’s latest government continued to deter investors despite more the USD200 billion worth of reconstruction spending in the pipeline.

The US, meanwhile, continues to churn out fair to good production, employment and confidence numbers that have blunted concerns about corporate earnings growth. Flows into actively managed US Equity Funds hit their highest level in 18 weeks as funds with a Growth style outperformed their Value counterparts across all capitalizations.

Funds investing in North America’s other big economy, Canada, extended their dismal run as investors continue to opt for Australia when looking for a developed markets commodities story. Current GDP forecasts for Australia are almost double those for Canada.

Both of the major diversified developed markets fund groups posted inflows. Flows into Pacific Equity Funds climbed to their highest weekly level since early 4Q10 while Global Equity Funds took in a modest USD74 million.

The week ending 11 January was a better one for Global Sector Funds as they absorbed over USD3 billion in fresh money, with Commodities, Healthcare/Biotechnology, Consumer Goods and Real Estate Equity Funds all taking in over USD400 million for the week. Flows into Infrastructure Funds hit a 40 week high and Financial Sector Funds recorded inflows for the fifth time in the past six weeks.

Three of the 10 major fund groups recorded modest outflows, with Technology Sector Funds seeing the biggest redemptions following some very cautious earnings guidance from major companies. Telecom and Utilities Sector Funds were the other group to experience redemptions.

Healthcare/Biotechnology Sector Funds posted strong inflows for the second straight week, although retail interest fell back after hitting a seven month high the previous week. The sector is expected to see considerable M&A activity this year as US and European firms respond to new mandates and to changing demographics.

For the first time since 2007 Commodities Sector Funds are not the quickest sector fund group out of the blocks: that honor belongs to Healthcare/Biotechnology Sector Funds which have taken in nearly USD900 million during the first two weeks of 2012.

A slightly more sanguine view about Europe’s ability to get through the year without a major crisis, the improving US economy and hunger for yield shaped flows in EPFR Global-tracked Bond Funds during the second week of the New Year. US Bond Funds extended their current inflow streak to 10 weeks and USD35 billion, Global Bond Funds took in over USD2 billion, both Municipal and High Yield Bond Funds absorbed over USD1 billion and Europe Bond Funds saw fresh money for the first time since early September.

The only one of major fund groups to record outflows was Emerging Market Bond Funds. "Much of that was due to a single fund reporting a month’s worth of flow activity in a single week," noted EPFR Global Director of Research Cameron Brandt. "If those were factored out the EM Hard Currency Bond Funds enjoyed their first inflow in over a month."

Flows into US Bond Funds continue to favour specific asset classes, with US Municipal Bond Funds accounting for nearly a quarter of the weekly total. "Retail investors seemed to be playing catch up after a year when they heeded dire predictions for this asset class that have yet to materialise," observed Brandt. "With US taxes likely to rise this year, unless Congress punts completely on the deficit, they are also getting a second look from people looking to minimise the impact of future hikes."

While some fiscal tightening is expected later this year, the betting on US monetary policy continues to favour another round of quantitative easing to sustain the current recovery. QE3, if it happens, is expected to target the US mortgage market. This perception has given Mortgage Backed Bond Funds, already on a roll because of their perceived government guarantee, another boost: the latest week’s inflows were the third largest since the start of 2011.

Flows into Europe Bond Funds, meanwhile, reflected the cautious optimism that saw yields on Spanish and Italian short-term government debt fall sharply during auctions on 13 Jan.

 

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