Cautious optimism about Japan’s recovery, the strength of the US economy and the possibility of a negotiated exit for Libyan leader Muammer Gaddafi helped lift EPFR Global-tracked Emerging Markets Equity Funds end 1Q11 with their highest weekly inflow, USD2.6 billion, since the first week of January. Between these bookends, however, this fund group endured its roughest quarter since investors pulled USD25.6 billion out of them during 3Q08.
The opposite was true for Developed Markets Equity Funds. Although concerns about the impact of higher energy prices on inflation, interest rates and growth sapped their momentum in March, they were still able to celebrate their best start to a year since they absorbed USD63.3 billion during 1Q06.
At the country and sector level funds investing in commodities and energy, and countries outside the Middle East and Africa that have big reserves of both, attracted strong inflows. Flows into Russia and Canada Equity Funds during the quarter were 104% and 101% of their full year records.
On the fixed income side, Bond Funds posted their biggest collective inflow since early November. But the only major fund group to fare better than the comparable period last year was High Yield Bond Funds while flows into US Bond Funds were running at less than a tenth their pace during 1Q10.
During the week ending March 30 EPFR Global-tracked bond funds took in a net USD3.35 billion while their equity counterparts absorbed USD8.85 billion. Outflows from Money Market Funds totalled USD6.54 billion.
EPFR Global-tracked Emerging Markets Equity Funds ended March by posting only their second week of inflows since the second half of January, with both Asia ex-Japan Equity Funds and the diversified Global Emerging Markets (GEM) Equity Funds snapping nine week outflow streaks and EMEA Equity Funds posting their biggest inflow since the week ending Dec 12, 2007.
Flows into EMEA Equity Funds, the only major emerging markets equity fund group to post inflows during the quarter, continue to be driven by enthusiasm for Russia’s commodities story and the fact it is the world’s largest oil producer outside the Middle East and Africa. Russia Equity Funds have taken in fresh money all but two of the 26 weeks since the beginning of 4Q10, absorbing just under USD5 billion during that run.
The other BRIC (Brazil, Russia, India and China) markets and funds that play this theme have not fared so well, with investors tending to focus on their efforts to control rising prices rather than the growth that is helping fuel that inflation. China’s restated commitment to rebalancing its economy towards domestic consumption has, however, helped Greater China Equity Funds regain some lost ground with inflows hitting a 12 week high going into April.
Latin America Equity Funds ended the quarter by recording outflows for the 11th consecutive week, although sentiment towards the region’s biggest market shows some signs of thawing with Brazil Equity Funds posting inflows for the first time since the second week of January as evidence that fiscal discipline is beginning to have an effect brightened the outlook for interest rates.
Despite the headwinds generated by Japan’s nuclear woes, rising inflation, the looming end to the US Federal Reserve’s QE2 program and the ongoing Eurozone debt crisis, EPFR Global-tracked Developed Markets Funds ended the first quarter by posting inflows for the 10th time in the past 13 weeks.
US Equity Funds led the way, in dollar terms, with broadly based inflows across all capitalizations and investment styles that snapped a two week losing streak. Year to date it is the US Large Cap Equity Funds with the most total inflows in USD terms, while the US Midcap Equity Fund inflows are stronger on a percentage of total assets basis. Retail investors committed fresh money for the first time since the third week of February, with actively managed funds – which suffered net redemptions in excess of USD80 billion last year, accounting for a quarter of the total inflows. Canada Equity Funds also enjoyed another strong week of inflows.
Institutional redemptions for the first time in 12 weeks resulted in Japan Equity Funds posting net outflows for only the second week year-to-date. The disruption to the country’s manufacturing base caused by the March 11 earthquake and tsunami, the growing contamination from the Fukushima nuclear power plant and the prospect that income and corporate taxes may be hiked to pay for the estimated USD300 billion reconstruction bill, were among the factors driving investors to the sidelines.
Europe Equity Funds eked out very modest inflows for the week as investors waited to see how Portugal’s political situation, the latest financial sector "stress tests" and the latest inflation numbers played out. Netherlands Equity Funds posted their biggest inflow in over seven years and Germany Equity Funds took in fresh money for 11th time YTD.
Flows into Global Equity Funds were again positive as this fund group wrapped up its best start to a year since it took in USD31.6 billion during the first three months of 2007. Pacific Equity Funds, the other major diversified fund group that invests primarily in developed markets, posted outflows for the seventh time in the past eight weeks.
A renewed interest in sector-based investing helped EPFR Global-tracked Global Sector Funds pull in a collective USD25.8 billion during the first quarter of 2011, an amount equal to more than half the full year total for 2010. Energy Sector Funds and Commodity Sector Funds were the biggest money magnets, with both taking in over USD500 million during the final week of a quarter that saw gold prices hit fresh record highs and some grades of oil commanding over USD110 a barrel.
Financial Sector Funds, which enjoyed a strong run during the 4Q10, have lost momentum in recent weeks as the Eurozone debt crisis rolls on, the bills for Japan’s disaster mount and policymakers push for less accommodative regulatory and tax frameworks. The latest week saw outflows hit their highest total since the final week of November. Real Estate Sector Funds, one of three groups along with Commodities Sector Funds and Consumer Goods Sector Funds to set inflow records last year, have also seen new commitments ebb in recent weeks.
Although they ended March having recorded outflows YTD, Healthcare/Biotechnology Sector Funds have posted inflows four of the past five weeks. The last time this fund group ended a year in positive flows territory was 2004.
In a quarter where yield and inflation jockeyed with doubts about US municipal and European sovereign debt as the dominant themes, the final week saw flows into Global and Emerging Markets Bond Funds hit 10 and 11 week highs respective, Europe Bond Funds posted outflows for the 24th time since the beginning of 4Q10, High Yield Bond Funds absorbed nearly USD1 billion and US Municipal Bond Funds extended their current losing streak to 20 consecutive weeks.
Fund groups on course to set new full year records for inflows include High Yield and Floating Rate Funds while Europe and US Municipal Bond Funds are currently candidates for record-setting outflows.
"One thing that has caught our eye is the YTD inflows to Floating Rate Bond Funds" commonly known as bank loan funds — which now stand at USD10.6 billion, says EPFR Global Managing Director Brad Durham . "This compares with record-setting inflows of USD11.1 billion last year and represents a whopping 23% of the total assets in this fund group at the beginning of the year. It seems fears of inflation and rate hikes are causing investors to push money into these funds and into the Inflation Protected funds that we track."
Flows into Emerging Markets Bond Funds continue to favour funds with local currency mandates and, from a geographic perspective, those with an Asian focus. YTD local currency funds have accounted for all of the net inflows into EM bond funds as a whole.
Balanced Funds, which invest in both debt and equities, have posted inflows every week YTD but are taking in money at roughly half the pace they were at the same point last year.