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EM bond and gold funds shine amidst gloom

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Emerging Markets Bond Funds continued to cement their "safe haven" status in early August as fresh fears about the ability of the Eurozone to contain its debt crisis roiled global markets already on edge due to the US debt ceiling circus and multiple signs of slowing economic growth. During a week when EPFR Global-tracked US Equity and Bond Funds posted their biggest outflows since 2Q10 and 4Q10 respectively, Emerging Markets Bond Funds took in over USD1 billion for the second time year-to-date and those focusing on local currency debt enjoyed their best week in over a year.

Gold Funds and Germany Equity Funds also retained their attraction for shell-shocked investors. But overall, eight of the nine major equity fund groups tracked posted outflows during the week ending August 2, as did seven of the nine main sector fund groups. Collective redemptions from Equity Funds for the week totalled USD7.9 billion while investors pulled a net USD1.2 billion out of Bond Funds.

Outflows from Money Market Funds were an eye-popping USD69.9 billion, a weekly record, as fears the impact of possible US and European sovereign defaults could have on liquidity took their toll. But daily data showed flows rebounding after the US debt ceiling deal, with over USD20 billion returning during the final two days.

With fears of a double-dip recession in key export markets gaining traction, EPFR Global-tracked Emerging Markets Equity Funds struggled to attract fresh money going into August. Only one of the four major fund groups, Asia ex-Japan Equity Funds, managed to do so as collective outflows climbed to an 11 week high. The diversified Global Emerging Markets (GEM) Equity Funds experienced the biggest redemptions in dollar terms while Latin America Equity Funds — which turned in the worst performance — were hardest hit in percentage of assets under management terms.

The outflows from Latin America Equity Funds, the seventh in the past eight weeks, took the YTD total over the USD4.5 billion mark. Concerns about the regionMexico Equity Funds having their worst week since late December as investors penciled in reduced US demand for the country

EMEA Equity Funds extended their outflow streak to 13 consecutive weeks as the continuing Eurozone debt crisis, slowing global growth and political uncertainty in Turkey, the Middle East and South Africa kept the pressure on this fund group. Only one sub-group, Czech Equity Funds, managed to attract any fresh money during the week.

Although daily data showed a mildly positive response to the US debt ceiling deal, the damage in flow terms during the week ending August 2 had already been done. Redemptions from US Equity Funds hit a 50 week high and outflows from the diversified Global Equity Funds, which generally have significant exposure to the US, exceeded USD1 billion for the second week running. Overall, investors pulled the biggest amount from Developed Market Equity Funds since the first week of July 2010 as Europe

Actively managed US Equity Funds continued to bear the brunt of investor angst over the down-to-the-wire negotiations over deficit reductions and the federal debt ceiling. Over USD4 billion was pulled out during a week when YTD flows for all US Equity Funds turned negative for the first time. Redemptions by retail investors hit their highest level in over 14 months.

Institutional investors were mainly responsible for the five week inflow streak into Japan Equity Funds ending. The yen

Fears that Eurozone policymakers are losing control of the debt crisis that has bedeviled the 16-nation currency union since 2Q10 resulted in another week of heavy outflows from both Europe and Europe ex-UK Regional Equity Funds that were only partially offset by the over USD400 million absorbed by Germany Equity Funds. YTD outflows from both the major regional fund groups now total USD9.4 billion while flows into Germany Equity Funds now exceed USD16 billion.

Pacific Equity Funds, the other major diversified developed markets fund group, posted outflows for the fourth week in a row.

Commodities Sector Funds again stood out among the nine major global sector fund groups tracked by EPFR Global going into August as investors sought exposure to gold and precious metals. It was also, for the second week running, the only one of the nine to turn in a positive performance. "Outside of gold and precious metals funds this group actually had a pretty tough week," noted EPFR Global Research Director Cameron Brandt. "Rosy demand scenarios for industrial commodities during the second half of the year are thin on the ground at present."

The defensive Utilities Sector Funds were the only other group to post inflows during the week. The other seven fund groups posted outflows ranging from USD47 million to USD526 million. Energy Sector Funds had the worst performance numbers for the week, closely followed by Healthcare/Biotechnology Sector Funds. The latter have seen over USD700 million pulled out over the past two weeks as investors reassess the outlook for public funding in the wake of the US debt ceiling agreement.

Flows into Financial Sector Funds were negative for the third time in the past four weeks but remain modest in light of the challenges, real and projected, that this sector is facing.

The uncertainty surrounding negotiations over the US debt ceiling was reflected in the hefty outflows posted by EPFR Global-tracked US Bond Funds during the week ending August 2 which, in both dollar and percentage of AUM terms, eclipsed the redemptions experienced by Europe Bond Funds.

The messy end-game in Washington, DC, also did High Yield, Municipal and Floating Rate Bond Funds no favors. But the clouds over developed markets sovereign debt allowed Emerging Markets Bond Funds to shine, and Global Bond Funds extended their current inflow streak to 16 straight weeks.

Emerging Market Bond Funds have now taken in fresh money for 19 weeks in a row, taking YTD inflows over the USD19 billion level. "Emerging markets debt is more of a pure play on emerging markets macro economic fundamentals and fiscal strength relative to developed markets than equity," observed EPFR Global Managing Director Brad Durham. "At the moment those fundamentals look a lot safer than the ones on offer in the developed markets."
 
An asset class that used to be synonymous with safety, municipal debt, came under renewed pressure because of questions about the US debt ceiling dealMunicipal Bond Funds, which had been tapering off in recent weeks, jumped to a 15 week high.
 
The subdued outlook for growth in key developed markets kept the pressure on Inflation Protection and Floating Rate Bond Funds. The former extended their longest outflow streak in over seven months while redemptions from the latter climbed to levels last seen in 4Q08.
 
Outflows from Europe Bond Funds were a relatively modest USD337 million for the week. As was the case with their equity counterparts, inflows into funds focusing on German debt were offset by redemptions from funds with a regional focus.

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