Despite signs that returns in some fixed income asset classes are faltering under the recent flood of fresh money, investors committed another USD7.57 billion, a new weekly record, to EPFR Global-tracked Bond Funds during the second week of March.
The usual suspects — High Yield, Emerging Markets, Municipal and Mortgaged Backed Bond Funds — were again to the fore as the US and Japanese central banks reaffirmed their commitment to ultra-low interest rates.
Equity Funds also enjoyed a solid week, with investors showing a strong preference for exchange traded funds, as the Dow Jones set up shop above the 13,000 point mark and the Nikkei briefly breached the 10,000 point mark. "ETFs certainly provide investors with the quickest way to tap into the latest bounce in global equity markets," observed EPFR Global Research Director Cameron Brandt. "But, given the timing, some of the money may be looking to benefit from the quarterly rebalancing of many funds at the end of this month."
Investors retained their appetite for Alternative and Dividend Equity Funds, steered over USD3 billion into Global Sector Funds and committed the most money to Japan Equity Funds since mid-3Q11. They continued pulling money out of Europe Equity Funds ahead of the official approvals of Greece’s latest bailout package, although the pace of redemptions slowed as the week progressed, and remained leery of fund groups with significant exposure to China.
Flows into the diversified Global Emerging Markets (GEM) Equity Funds during the week ending March 14 suggested that broad based support among investors for emerging markets equity remains intact. But the impact of China’s recent announcement lowering this year’s full year GDP target and its latest trade deficit figures were reflected in the first back-to-back weeks of outflows for Asia ex-Japan Equity Funds year-to-date.
Collectively, all EPFR Global-tracked Emerging Markets Equity Funds recorded inflows for the 12th straight week despite the biggest retail redemptions since the first week of January and remain on track for their best start to a year since 2006.
Data showing the biggest monthly trade deficit in the past decade added to the concerns about China and, by extension, some of its key regional trading partners. Korea Equity Funds, which have benefited in the past from the growing share of Korea’s trade going to China, posted their biggest weekly outflow since 4Q07.
Latin America Equity Funds, however, were buffered by the continued improvement in the US economy. They took in fresh money for the seventh time in nine weeks, snapping a two week outflow streak and taking YTD inflows over the USD400 million mark compared to outflows of USD1.82 billion during the same period last year.
Uncertainty about growth in developed Europe, weaker gold prices and Hungary’s continuing fall from grace combined to end the longest EMEA Equity Fund inflow streak since 2Q11. Russia Equity Funds did attract new money for the seventh week running as oil prices remain high.
With the latest Greek rescue package collecting the necessary approvals, developed markets investors could devote more attention in mid-March to growth in the US, the benefits for Japanese exporters of a more competitive currency and the confidence expressed by Germany’s investor class. Retail investors, however, remained largely on the sidelines, with none of the five major Developed Markets Fund groups attracting fresh money from them.
Flows into US Equity Funds were consistent with a week that saw more good macroeconomic news and a cautiously optimistic assessment from the US Federal Reserve. Institutional investors committed the most money since the second week of September with funds managed for growth outperforming their value counterparts across all capitalizations. Canada Equity Funds also benefited, enjoying their best week since mid-December. Among actively managed funds, however, only US Large Cap Growth succeeded in attracting fresh money.
With the weaker yen boosting exporters and spurring the benchmark Nikkei index back over the 10,000 point mark, Japan Equity Funds saw inflows jump to their highest level since last August. Over 90% of the fresh money flowed into ETFs. "Flows have been quite volatile in recent weeks, reflecting the tension between an improving outlook for export plays and the Bank of Japan’s asset buying program on the one hand and the lack of credible political leadership on the other," says Brandt.
Europe Equity Funds experienced another week of outflows that touched nearly every sub-group. But daily data did show a slow moderation in the outflows as Greece’s creditors moved closer to signing off on the latest bailout and German investor confidence hit levels last seen in 2Q10. Demand for exposure to the big non-euro markets has waned again as Greece’s problems leave center stage with both UK and Switzerland Equity Funds seeing outflows. Switzerland’s was the largest since the second week of December.
The two major diversified developed markets fund groups repeated the previous week’s pattern, with Global Equity Funds posting modest inflows while Pacific Equity Funds recorded outflows for the third straight week.
EPFR Global-tracked Sector Funds pulled in over USD3.4 billion during the second week of March, with Telecoms and Infrastructure Sector Funds the only ones of the 11 major groups to see outflows, as investors positioned themselves for the quarterly rebalancing of ETFs, the first quarter earnings season and the possibility that US growth will gain further momentum.
Consumer Goods Sector Funds saw the biggest inflows, taking in over USD900 million, and Industrial, Financial and Energy Sector Funds all absorbed over USD500 million for the week. Financial Sector Funds, which have been the laggards YTD in flow terms, have benefited from the European Central Bank’s latest injection of funds and the generally positive outcome of the latest "stress testing"of US banks and insurers.
Elsewhere, Utilities Sector Funds saw a five week outflow streak snapped and Healthcare/Biotechnology, Real Estate, Commodities and Technology Sector Funds took in between USD88 million and USD209 million. Funds specialising in gold and precious metals accounted for the bulk of the flows into the Commodities Sector Funds despite the recent drop in gold prices.
YTD Commodities, Real Estate and Energy Sector Funds are, in that order, the biggest money magnets while Utilities and Technology Sector Funds have seen the biggest net redemption. During the same period last year Energy, Commodities and Technology Sector Funds led the pack while Consumer Goods and Healthcare/Biotechnology Sector Funds brought up the rear.
Investors stuck to their recent guns when it came to steering fresh money into EPFR Global-tracked Bond Funds, with record-setting weekly flows again favoring asset classes that promise higher returns. After the latest week Mortgage Backed Bond Funds have now taken in fresh money every week for over a year, YTD flows into High Yield Bond Funds are within striking distance of the USD24 billion mark and Emerging Markets Bond Funds have posted two of their four biggest weekly inflows since the beginning of February.
It was also a better week for funds with European connections. Europe and EMEA Bond Funds snapped outflow streaks of three and 10 weeks on the heels of the ECB’s latest intervention Global Bond Funds took in fresh money for the 12th week in a row.
US Bond Funds focusing on municipal, mortgage backed, corporate high yield and intermediate term debt again accounted for over 70% of the week’s inflows. Flows into US High Yield Bonds have, however, been losing altitude since they peaked in early February. Fund performance, however, is still heading north. Flows into Municipal Bond Funds are also showing signs of losing momentum as prior inflows squeeze returns and the trials of Harrisburg, Pennsylvania and Alabama’s Jefferson County get more attention.
Emerging Markets Bond Funds had another strong week, with flows the fourth best on record, reflecting their position as the best performing pure fixed income fund group YTD ahead of High Yield Bond Funds. They still lag Balanced Funds, which invest in both fixed income assets and equities and carried a 7.8% gain into the third week of March.