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Commodity fund outflows chill as growth slows

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Investors inclined to sell in May and go away for the summer have plenty of reasons to get an early start this year, with lacklustre macroeconomic data joining a list that includes turmoil in the Middle East, inflationary pressures in emerging markets, the long-running Eurozone debt crisis and the challenges facing Japan.

 

During the week ending May 4 — two days prior to the better-than-expected jobs data in the US appeared to improve investor sentiment — Commodity and Energy Sector Funds posted big outflows as data showed US economic growth slowing sharply during Q1 2011.

Even as investor sentiment was deteriorating over the past week, overall flows into all Equity Funds and all Bond Funds remained positive. Equity funds absorbed USD4.7 billion – of which USD1.2 billion went into Emerging Markets Equity Funds – while the bond funds took in USD4 billion.
 
"Behind those numbers was a shift that favored defensive sectors, some diversified fund groups and ETFs over actively managed funds," noted Cameron Brandt, EPFR Global’s Director of Research. "Money Market Funds also took in fresh money for the fifth time in the past six weeks despite the minimal returns on offer and the dollar

Flows into Alternative Funds – which include Convertible Bond, Currency and Derivative Funds – climbed to a 32 week high.

EPFR Global-tracked Emerging Markets Equity Funds posted inflows for the sixth straight week in early May, with the bulk of the fresh money going into the diversified Global Emerging Markets (GEM) Equity Funds. Year-to-date outflows, which peaked at USD27 billion in late March, have now dropped below USD12 billion.

The major regional fund groups, however, struggled as key central banks continue to struggle with inflation and the weaker growth among developed markets raised questions about commodities and export stories. Latin America Equity Funds posted outflows for the 14th time in the past 15 weeks, while flows into Asia ex-Japan Equity Funds fell to a six week low as India hiked interest rates again and China

Outflows from China Equity Funds hit a 12 week high during the seven days ending May 4. But the recent enthusiasm for Korea, whose exporters have been wresting market share from competitors, was reflected in a seventh consecutive week of inflows for Korea Equity Funds, their longest run since early 2Q10. Vietnam Equity Funds took in fresh money for the 22nd straight week as investors keep buying into its low-cost manufacturing story.

Once again Russia stood out among the EMEA and BRIC markets, with Russia Equity Funds taking in fresh money for the 29th time in the 31 weeks since the beginning of 4Q10 despite the pummeling that Commodity and Energy Sector Funds took during the same period. But the BRIC (Brazil, China, India and Russia) theme remains in the doldrums: YTD, dedicated BRIC Equity Funds have posted outflows 16 of 18 weeks that total over USD2.4 billion.

Flows into EPFR Global-tracked Developed Markets Funds during early May retained some of the previous weekUS Equity Funds again led the way in dollar terms while Japan Equity Funds had the best week in terms of flows as a percentage of assets under management.

Japan Equity Funds benefited from renewed interest from retail investors, whose commitments – the first since early March – climbed to a 10 week high as they discounted the power and supply chain problems facing Japanese manufacturers in the aftermath of the March 11 earthquake and tsunami. But renewed appreciation of the yen versus the US dollar is adding to the pressure on the country.

Retail investors remain much less forgiving of Europe and its debt crisis. Although Europe Equity Funds posted modest inflows for the week, retail redemptions YTD climbed over the USD1.5 billion mark. Overall flows favoured regional and Germany specific funds at the expense of funds dedicated to smaller countries, with Netherlands Equity Funds posting a record weekly outflow.

Flows into US Equity Funds were again heavily slanted towards ETFs in general and those focusing on Large Cap stocks in particular. ETFs accounted for over 95% of the weekUS Equity Funds have posted net inflows of over USD35 billion. For the same periods 2009 and 2010 they had posted outflows of USD28.1 billion and inflows of USD18.9 billion respectively.

Global Equity Funds managed to extend their current inflow streak to seven straight weeks. But the other major diversified developed markets fund group, Pacific Equity Funds, saw their four week run come to an end.

The robust inflows enjoyed by Commodity Sector Funds in recent weeks came to an abrupt halt in early May as investors scrambled to book recent gains before they evaporated. Redemptions, spearheaded by institutional investors, hit their highest weekly total on record. Funds focusing on gold and precious metals were again at the centre of the action, with concerns that prices have climbed too far given added weight by weaker macroeconomic data.

The prospect of slowing demand also hit Energy Sector Funds, which saw over USD1 billion pulled out during the week ending May 4, and brought Technology Sector Funds back to earth. Outflows from Utilities Sector Funds also hit a six week high.

Institutional investors switched their focus to more defensive sectors. They committed fresh money to Healthcare/Biotechnology Sector Funds for the ninth time in the past 10 weeks, helping those funds post a weekly inflow record, and were responsible for the bulk of the fresh money absorbed by Consumer Goods Sector Funds.

Financial and Real Estate Sector Funds posted modest inflows for the week, reflecting expectations that the US Federal reserve will continue to run a very loose monetary policy after QE2 has run its course at the end of June.

The week ending May 4 saw flows into EPFR Global-tracked bond funds hew to the general pattern that has dominated the year so far. That meant fair to good flows into High Yield, Floating Rate, Global and Emerging Markets Bond Funds, another week of inflows for Balanced Funds and fresh redemptions from Europe Bond Funds and US Municipal Bond Funds.

Concerns about inflation, the trajectory of the US dollar and yield remain major drivers of bond fund flows. High Yield Bond Funds saw YTD inflows move over the USD20 billion mark, Floating Rate and Inflation Protection Funds took in fresh money for 44th and 19th consecutive week and Emerging Markets Local Currency Bond Funds posted another week of solid inflows.

This uncertainty has generated demand for more diversified exposure. Flows into Global Bond Funds hit a 29 week high while Balanced Funds, which invest in both equity and fixed income, maintained their record of posting inflows every week YTD. The headline number for the latter was a weekly record, but was driven by the merging of a Legg Mason Large Cap Equity fund with one of their Balanced Funds.

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