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‘Cyprus effect’ on fund flows muted but equity investors take the NAFTA route

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Fears that a bailout package for Cyprus that called for a one-off levy on existing depositors might prompt bank customers in Spain, Italy and Portugal to head for the exits gave investors and markets pause for thought in mid-March.

 
Flows into EPFR Global-tracked equity funds slipped to less than a fifth of the previous week’s level, with Europe and emerging Europe equity funds posting their biggest outflows in 29 and 61 weeks respectively, but were positive overall for the 17th week running as daily data suggested some developed market investors saw drops in global equity markets as a buying opportunity.
 
Funds dedicated to the three NAFTA markets, the US, Mexico and Canada fared better than most during the week ending March 20. US equity funds took in over USD2bn, commitments to Canada equity funds climbed to a 12 week high and Mexico equity funds posted the biggest inflows of any emerging markets country fund.
 
Overall, EPFR Global-tracked equity funds took in a net USD2.5bn as they extended their longest inflow streak in over a decade. Bond Funds took in USD3.68bn while money market funds posted outflows for the eighth time in the past 10 weeks as their flows follow a pattern remarkably similar to the one they established between 4Q11 and 2Q12.
 
EPFR Global-tracked emerging markets equity funds posted their biggest collective outflows in over five months during the third week of March as concerns about inflation, the possibility of currency wars, shifts in China’s economic policies and the potential fallout from the bailout package cooked up for – and rejected by – Cyprus dulled investors’ appetite for this asset class. Redemptions from the diversified global emerging markets equity funds hit a 44 week high and, of the three major regional fund groups, only Asia ex-Japan equity funds attracted fresh money.
 
The fact that Asia ex-Japan Equity Funds did post inflows was due to the region’s smaller markets. Thailand and Philippines Equity Funds both extended their recent inflow streaks as investors bought into the outperformance by those markets, and Vietnam equity funds took in fresh money for the 12th straight week. China equity funds, meanwhile, posted outflows for the fourth week in a row while Korea equity funds surrendered a net USD188bn.
America’s recovering economy – and its appetite for competitively priced Japanese exports – shaped flows into EPFR Global-tracked developed markets equity funds for the third week running heading into late March. Europe equity funds, however, extended their longest outflow streak since August as the doors of Cypriot banks remained shut.
 
Flows into actively managed US equity funds hit a seven week high as investors, comforted by the Federal Reserve’s affirmation of its current accommodative policies, focused on funds offering exposure to small and mid-cap plays and US sectors. North of the border Canada equity funds took in USD752m, their biggest weekly inflow in nearly three months.
 
The uncertainty surrounding efforts to stabilise Cyprus’s banking sector did not send investors rushing back into gold during the third week of March. Gold funds saw nearly USD1bn flow out during a week when investors increased their exposure to most sectors, with 10 of the 11 major sector fund groups tracked by EPFR Global posting inflows ranging from USD40m to USD805m.
 
Once again, however, the flows had a defensive bias with consumer goods, healthcare/biotechnology and utilities sector funds the leaders when it came to attracting fresh money. Flows into consumer goods sector funds climbed to a nine week high while utilities sector funds posted their biggest weekly inflow since mid-4Q11. Healthcare/biotechnology sector funds continued their strong start to the year, with YTD inflows now exceeding any of the full year totals for the past decade.
Mirroring the trend among EPFR Global-tracked equity funds, flows into bond funds continued to pivot towards the US and away from funds exposed to European and emerging markets debt. US bond funds accounted for over 80 per cent of all bond fund inflows for the week as Europe bond funds recorded outflows and commitments to emerging markets bond funds were the second lowest YTD.
 
Within the US bond fund universe investors remained either camped at the short end of the yield curve or prospecting among the higher risk, higher return asset classes. Short term government and corporate bond funds outgained their long and intermediate term counterparts while US floating rate funds attracted another USD1.4bn. But municipal bond funds saw their biggest outflow in 12 weeks as higher risk appetite, Detroit’s financial struggles, and fresh speculation their tax-exempt status could be a casualty of any long term budget deal weighed on this asset class.
 
Redemptions from Europe bond funds overall were a modest USD40m overall with funds dedicated to markets outside the Eurozone the biggest contributors as Norway, Sweden, UK and Denmark bond funds all recorded outflows for the week.
 
While the arrival of a new and more aggressive central bank chief has added to the enthusiasm for Japanese equity, the same cannot be said for Japan bond funds. Flows have declined for three straight weeks, with the latest redemptions the biggest since the fourth week of August.
 
For emerging market bond funds, funds with local currency mandate outgained their hard currency counterparts, funds with an emerging Asia focus topped the regional fund groups in terms of both flows and performance, and China bond funds were by far the most successful country fund group when it came to attracting fresh money.

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