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EM Bond and Equity funds enjoy another solid week ahead of Greek swap deadline

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Investors continued prospecting in the higher reaches of the risk curve during early March against a backdrop that included more decent US data, China’s announcement of a lower GDP target, an easing of the tensions surrounding Iran’s nuclear program and the countdown to the deadline for Greece’s debt swap.

EPFR Global-tracked Emerging Markets Bond Funds and Global Emerging Markets (GEM) Equity Funds took in over USD1 billion, Mortgage Backed Bond Funds’ inflow streak hit the one year mark and High Yield Bond Funds saw year-to-date inflows approaching nearly three times that of the full year total for 2011.

Fund groups associated with Europe again posted modest outflows, although retail investor redemptions from Europe Equity Funds fell to their lowest level since mid-2Q11. Retail investors remain unimpressed with the Dow Jones’s foray above the 13,000 point mark but retain their appetite for dividend paying stocks: they have committed money to Dividend Equity Funds 57 of the 62 weeks since the start of last year.

Overall, EPFR Global-tracked Equity Funds posted outflows of USD4.3 billion for the week ending March 7 while Bond Funds took in a net USD6.9 billion and Money Market Funds saw inflows of USD5.9 billion.

China’s announcement that it is cutting its GDP target for the year hit Asia ex-Japan Equity Funds during the first week of March, snapping their eight week inflow streak, as institutional emerging markets investors retreated to the relative comfort of the geographically diversified GEM Equity Funds. The USD1.3 billion committed to GEM funds allowed the combined Emerging Markets Equity Funds tracked by EPFR Global to extend their longest inflow streak since 4Q10 despite the first week of net redemptions by retail investors since early January.

The prospect of less than double-digit Chinese growth also hit markets — and the funds that invest in them — geared to Chinese demand. Korea Equity Funds saw their biggest redemptions since the third week of November and Taiwan Equity Funds extended their current outflow streak to six straight weeks.

Latin America Equity Funds also suffered, posting back-to-back weekly outflows for the second time YTD despite solid flows into Brazil Equity Funds. Investors have been more defensive this year when it comes to Latin America: Chile Equity Funds have taken in fresh money eight of the past nine weeks, in part encouraged by higher copper prices, and lead the regional country fund groups in terms of YTD inflows.

Elsewhere, Russia Equity Funds took in over USD100 million for the sixth consecutive week as oil prices remain high and the country’s presidential election delivered the result nearly everyone expected. That helped EMEA Equity Funds extend their longest inflow streak since a seven-week run ended in early May. South Africa also attracted interest and money, with South Africa Equity Funds having their best week since early 4Q07, as investors responded to the country’s commodities story and expectations it will exceed modest full year growth forecasts.

Concerns that Greece would not jump through all the hoops needed to unlock the next round of bailout financing, thereby avoiding a hard default later this month, and China’s weaker growth projections triggered profit taking on both sides of the Atlantic and Pacific during the first week of March. Of the major EPFR Global-tracked Developed Markets Equity Fund groups, only Canada and Global Equity Funds managed to attract fresh money.

US Equity Funds led the way in outflows in dollar terms, with over USD5 billion flowing out. That took YTD inflows, which peaked in early February at USD12.3 billion, down to below the USD1 billion mark. The bulk of the redemptions came from Small and Large Cap ETFs, with actively managed Large Cap Growth and Blend Funds attracting modest amounts of money. But funds dedicated to North America’s other major developed economy, Canada, had their best week YTD as oil prices remained high.

High energy prices remain one of the headwinds facing Japan. The bill for imported oil, gas and coal needed to generate the power previously supplied by nuclear plants was reflected in January’s record setting current account deficit. That, allied to the glacial pace of reconstruction work and mounting speculation the current administration is already in "lame duck territory," prompted investors to pull USD443 million from Japan Equity Funds, the most since mid-December. But investors and fund performance are heading in different directions, with YTD net outflows of USD1.6 billion despite a fund group return of 12% so far this year.

Despite the angst about Greece’s bond swap, outflows from Europe Equity Funds were modest and retail investors for once seemed more optimistic than their institutional counterparts. That optimism appears to have been warranted after the swap closed Thursday with an estimated 90% participation rate from private bond holders.

The two major diversified developed market fund groups, Global Equity Funds and Pacific Equity Funds, again took different tacks with the former posting modest inflows for the third time in four weeks while the latter posted their biggest outflow since the last week of December.
Sector Fund Flows

With the 4Q11 earnings season largely over and Greece’s debt swap in progress, investors removed over USD1 billion from EPFR Global-tracked Sector Funds during the first week of March. Commodities Sector Funds specialising in gold and precious metals saw the biggest outflows while Industrials Sector Funds, with an outflow of USD599 million, experienced their largest weekly redemption since mid-2Q11.

Flows into Energy Sector Funds turned negative as Iran offered to talk about its nuclear program, China cut its GDP forecast and the Northern Hemisphere’s winter heating season entered the home stretch. Both Financial Sector Funds and Real Estate Sector Funds posted outflows, the latter for the first time in nine weeks, despite signals from the US Federal reserve that it is still contemplating some kind of action to bolster the mortgage market.

Funds tied to sectors perceived as defensive continue to struggle. Utilities Sector Funds recorded their fifth consecutive week of outflows, taking the YTD total past the USD2 billion mark. That means investors have now pulled out more than half of the record setting amount they committed to these funds during 2011. Redemptions from Healthcare/Biotechnology Sector Funds also hit a 13 week high.

There was no change to recent patterns during early March when it came to fixed income funds. Investors continued to steer money into the fund groups associated with higher risk and higher returns. YTD flows into High Yield Bond Funds climbed above the USD23 billion level, Emerging Markets Bond Funds enjoyed their second best week of the year, Mortgage Backed Bond Funds took in fresh money for the 52nd straight week and flows into US Corporate Bond Funds remain on track for a new full year record.

Europe Bond Funds again posted modest outflows as investors waited to see how Greece’s debt swap would play out. But sentiment towards this asset appears to be improving again as regional banks deploy their latest cash infusion from the European Central Bank at sovereign debt auctions. Global Bond Funds, which on average allocate more than a third of their portfolios to Developed Europe, recorded their 11th straight week of inflows.

Sentiment towards emerging markets debt remains positive, although the share of funds going to Local Currency Emerging Markets Bond Funds slipped back from parity to a third of the amount flowing into their hard currency counterparts.

US Bond Funds focusing on municipal, mortgage backed, high yield and intermediate term debt accounted for over three-quarters of the USD4.1 billion this fund group absorbed for the week. YTD inflows now stand at USD29.5 billion versus USD3.75 billion during the comparable period last year.

And investors in the US have been more eager to move money from the sidelines than were European investors. Year to date, US Money Market Funds have recorded outflows of USD53.8 billion and Europe Money Market Funds inflows of USD3.49 billion versus outflows of USD61 billion and inflows of USD22.5 billion during the same period last year.

Flows into Balanced Funds, which invest in both fixed income assets and equities, hit their highest level since the third week of June.
 

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