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Bond funds benefit from money market redemptions

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The third quarter ended the way it started with fixed income funds – spearheaded by US bond funds – absorbing the biggest share of the cash moving out of money market funds in search of higher returns, according to EPFR Global.

Investors pulled another USD43.1bn out of the latter during the week ending 30 September, taking total outflows for 3Q09 over USD370bn, while committing another USD3.04bn to US bond funds.

Emerging market equity funds, which averaged USD2.03bn a week in new money during the second quarter, took in USD1.43bn during the final week of a quarter during which their average weekly inflow fell below USD740m.

Among equity funds investing primarily in developed markets, global and Japan equity funds again stood out. The former posted their 11th straight week of inflows while the latter suffered another tough week that further reversed the gains made earlier in 3Q09.

Overall, equity funds posted collective inflows of USD857m to end the quarter with net inflows over the past three months of USD21.7bn.

Fixed income funds absorbed another USD5.78bn, taking collective inflows for the third quarter over the USD68bn mark.

With investors wary of committing more money to China  ahead of a lengthy market holiday, they again opted for the diversified exposure offered by global emerging markets equity funds. This fund group absorbed a net USD999m during the final week of September, bringing inflows for the third quarter up to USD4.87bn, while Asia ex-Japan equity funds netted only USD59m to end the quarter with inflows of USD2.8bn – less than a quarter of the fresh money they took in during 2Q09.

EMEA equity funds also had a good week, taking in USD299m to round out a solid quarter that saw year-to-date flows pulled back into positive territory. Among the drivers were Russia, Turkey and emerging Europe, three markets that investors concluded had been oversold earlier in the year and therefore still offer some value. Emerging Europe regional and Turkey equity funds ended September by posting their 11th and sixth consecutive week of inflows respectively while Russia equity funds absorbed fresh money for the ninth time in 11 weeks.

The BRICs theme showed some life again in late September, with dedicated BRIC equity funds posting their third straight week of inflows and flows into India equity funds hitting a nine week high. But average weekly inflows into BRIC equity funds fell from USD135m a week during 2Q09 to USD80m during the third quarter.

Latin America equity funds recorded inflows of USD77m during the final week of a quarter that saw them attract another USD1.23bn.

Most of the EPFR Global-tracked equity funds investing primarily in developed markets fared better during the third quarter, which ended with global equity funds extending a strong inflow streak and Europe equity funds having seen YTD outflows shrink USD4.5bn at the beginning of the quarter to only USD730m going into 4Q09.

Japan equity funds were the exception. After posting a strong run of inflows ahead of the general election that handed power to the Democratic Party of Japan for the first time in its 11-year-existence, this fund group ended September with two consecutive weeks of outflows totaling USD1.54bn as investors waited to see how the new government will offset the impact of waning fiscal stimulus and yen appreciation on the Japanese economy.

Also hitting sentiment towards Japan were fresh doubts about the ability of the US consumer to recover their purchasing power any time soon. US equity funds felt the effects of those doubts, posting outflows for the first time in three weeks but ending the quarter having taken in a modest net USD2.9bn compared to outflows of USD2.8bn for 2Q9 and USD47.8bn during the first quarter. For the second week running growth funds outperformed value funds across small, mid, and large cap categories, although flows this week favoured value over growth.

Both of the major diversified fund groups investing primarily in developed markets recorded inflows. Global equity funds, which saw YTD flows move back into positive territory during early 3Q09, took in USD505m for the week and Pacific equity funds absorbed another USD20m.

Uncertainty about the ability of major economies to sustain the economic growth generated to monetary and fiscal stimulus policies saw flows shift towards the more defensive EPFR Global-tracked sector fund groups in late September. Utilities, telecom and consumer goods sector funds all posted inflows, with flows into the latter hitting an 11-week high.

This was, however, at odds with the overall pattern for 3Q09 during which the more growth-oriented commodities, energy, real estate and technology sector funds took in USD3.75bn, USD1.1bn, USD1.7bn and USD1.31bn respectively.

Commodities sector funds remain the runaway leader YTD in flow terms as concerns about US dollar weakness, optimism about US and Chinese demand and a revival of the “super cycle theory” have drawn investors to this asset class.

Heading into October EPFR Global-tracked fixed income funds continued to take in fresh cash at a robust pace. US bond funds took in over USD3bn for the third time in five weeks as YTD inflows moved north of USD60bn, balanced funds ran their current inflow streak to 25 weeks and USD7.4bn, global bond funds saw YTD inflows climb by another USD1.06bn to USD13.5bn and high yield bond funds absorbed another USD443m.

In addition to the accelerating flows into global and US bond funds, the story of the third quarter was the increasing appetite for exposure to emerging markets debt, especially riskier but potentially more rewarding local currency issues. Emerging markets bond funds ended September with back to back weeks of USD700m plus inflows and ended the quarter back in positive territory YTD.

The outflows from money market funds also accelerated during the third quarter, with redemptions during those three months equaling nearly 90 per cent of the total inflows for 2008.
 

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