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Diversified emerging markets funds benefit from recent thaw in risk aversion

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Hopes of more accommodative measures by the US Federal Reserve and the European Central Bank continued to drive equity prices higher and volatility measures lower during the second week of August.



There was an appreciable jump in risk appetite among investors, with EPFR Global-tracked emerging markets equity funds extending their longest inflow streak since the first quarter, high yield bond funds and emerging markets bond funds taking in fresh money for the 10th week running and commitments to technology sector funds hitting their highest level since late March.

US equity funds, meanwhile, posted back-to-back weeks of outflows for the first time since mid-May and inflows into US bond funds slipped to a six week low.

Overall, net flows into all bond funds for the week ending 15 August totalled USD4.02bn while USD5.67bn flowed out of all equity funds. Money market funds took in USD5.49bn.

At the country level Japan equity funds remain on course for their best year since 2005, UK equity funds posted their biggest weekly outflow — in dollar terms — on record and flows into Korea equity funds rebounded.

EPFR Global-tracked emerging markets equity funds absorbed another USD873m during the second week of August as their current inflow streak hit three straight weeks, the longest since a seven week run ended in late February. Once again the bulk of this new money went into the diversified global emerging markets equity funds, with Asia ex-Japan and EMEA equity funds also posting modest inflows while Latin America equity funds recorded outflows for the seventh time in the past eight weeks.

Retail investors continue to steer clear of this asset class. The last fund groups to see retail commitments were EMEA and Latin America equity funds during the first week of July, and overall emerging markets equity funds have seen retail redemptions for 24 consecutive weeks.

Flows into Asia ex-Japan equity funds remain hobbled by uncertainty about the trajectory of the region’s two biggest economies, China and India. Weak monsoon rains have raised the spectre of higher food inflation and weaker rural demand for India while China’s economy is still slowing. China equity funds have, however, recorded modest inflows four of the past five weeks.

With risk appetite rising and European policymakers still struggling with the Eurozone debt crisis, flows into EPFR Global-tracked developed markets equity funds were negative for the second straight week with US equity funds again seeing the biggest redemptions.

Outflows from US equity funds were broadly based, with all of the major sub-groupings by capitalisation, style and fund type (active or passive) experiencing redemptions. In addition to investors rotating money into riskier, more rewarding asset classes, these fund groups were hit by US macroeconomic data that was strong enough to dissuade the Federal Reserve from launching another round of quantitative easing.

Hopes that the ECB will pull out the stops remain high. But getting a consensus for the options being suggested remains difficult, with Germany’s central bank digging in against a proposal to buy large quantities of Eurozone sovereign bonds in order to cap borrowing costs. Europe equity funds recorded their biggest outflow since mid-May during the week ending August 15 with UK equity funds accounting for over a third of the collective redemptions.

Japan equity funds recoded their third straight week of solid inflows. Commitments to domestically domiciled Japan ETFs again the main driver as year-to-date flows pushed past the USD6bn mark.

The two major diversified developed markets fund groups again headed in opposite directions, with global equity funds taking in fresh money for the fifth time in the past six weeks and Pacific equity funds posting their biggest weekly outflow since early April.

Mixed economic data and signals from central banks saw flows into EPFR Global-tracked sector fund groups lose further momentum during the second week of August, with no fund group taking in over USD260m and the USD236m pulled out of industrial sector funds setting the floor on redemptions.

Technology and financial sector funds continue to benefit from hopes of further quantitative easing, extending their longest inflow streaks since April and YTD respectively. So did real estate sector funds, which saw YTD inflows push past the USD8bn mark.

Overall flows into commodities sector funds were negative as weak European data and doubts about China continued to weigh. But the prospect of further quantitative easing and food-driven inflation kept money flowing into funds specializing in gold and precious metals.

EPFR Global-tracked bond funds offering access to better yielding fixed income asset classes retained the allure during the second week of August. High yield bond funds saw their current inflow streak hit 10 weeks and USD15.9bn, mortgage backed bond funds posted inflows for the 74th consecutive week and emerging markets bond Funds took in another USD586m as flows into local currency funds exceeded those for hard currency funds for only the second time since the beginning of June.

Municipal bond funds again accounted for biggest inflows among the US bond fund sub-groups. There was less appetite for exposure to US sovereign debt, with long term government bond funds posting their biggest weekly outflow since the third week of March.

Bond investors showed more faith in the ECB’s scope for action, committing money to Europe bond funds for the second straight week and lifting the YTD inflow total past the USD700m mark. At the same point last year over USD18bn had flowed out of this fund group.

Balanced funds, which invest in both bonds and equities, extended their current inflow streak to six consecutive weeks as the YTD total hit USD15.5bn.

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