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EM Funds enjoy best start since 2006 as investors step up search for higher returns

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Asset classes promising better than average returns attracted strong inflows during the final week of January with flows into EPFR Global-tracked Emerging Market Equity Funds hitting a 43 week high, Municipal Bond Funds enjoying their best week in over five years and High Yield Bond Funds taking in another USD2.7 billion. Money Market Funds, whose seven day yield remains stuck around 0.02%, posted their biggest outflow since early August.

"Flows have again proved a good indicator of changing investor sentiment," says EPFR Global Managing Director Brad Durham (pictured). "The emerging markets equity funds we track have had their best start in six years – in flow terms – while the average portfolio is, in defiance of many defensive forecasts for the first half of 2012, up around 11%."

Overall, EPFR Global-tracked Bond Funds took in a net USD7.47 billion during the week ending Feb. 1. That was the biggest weekly total since EPFR Global started tracking them in 2Q02. Equity Funds absorbed USD1.28 billion as flows into Emerging Markets Equity Funds were partially offset by redemptions from US, Europe and Japan Equity Funds. Flows into Dividend Equity Funds were positive for the 55th time in the 57 weeks since the beginning of last year.

Retail investors remain cautious. But they steered money into Emerging Europe Equity Funds for the first time in over six months and their commitments to High Yield Bond Funds climbed to an eight week high.

Emerging Markets Equity Funds rounded out a month when they recorded inflows every single day by taking in another USD3.5 billion in the latest week, taking their monthly and YTD total to USD11.3 billion. The latest inflows were a 43-week high and were paced by commitments of USD2.6 billion to the diversified Global Emerging Markets (GEM) Equity Funds.

Among the regional fund groups EMEA Equity Funds stood out, taking in a 40 week high of USD217 million as interest in Russia and Emerging Europe climbed to levels last seen in early 2Q11. Russia Equity Funds benefited from renewed interest in commodity plays and Prime Minister Vladimir Putin’s latest pledges to improve the country’s investment climate.

Asia ex-Japan Equity Funds recorded their fourth straight week of inflows that lifted the YTD total to USD2.2 billion. During the comparable period last year they posted outflows of USD1.7 billion. Renewed enthusiasm for China’s economic story was again the key, with China Equity Funds extending their longest inflow streak since 4Q10 as more investors pencil in a soft landing for the world’s second largest economy.

Optimism about China and confidence in the US recovery is usually a supportive back drop for Latin America, with Latin America Equity Funds taking in fresh money for a third straight week. But there was little enthusiasm for direct exposure to the region’s smaller markets: Chile, Colombia, Peru and Argentina Equity Funds all posted modest outflows.

Going into February Developed Markets Equity Funds posted their biggest weekly outflow since the second week of December as European leaders wrestled with Greece’s intractable debt problems and the US kicked out some worse-than-expected confidence and housing numbers, thereby giving investors a reason for taking some profits.

Investors pulled money from Europe Equity Funds for the 12th time in the past 13 weeks and extended Germany Equity Funds’ current outflow streak to eight consecutive weeks despite the best start for some equity indexes in over a decade. Greece and its creditors are negotiating over the next round of emergency funding that is needed to meet debt payments in March and avoid an immediate default.

US Equity Funds saw USD2.67 billion redeemed during the week ending 1 February as retail investors pulled money out for the 30th consecutive week. US Mid Cap Funds did enjoy their best week since early 2Q11 thanks to institutional investors and funds with a Growth style outperformed their Value counterparts for the third week running.

Retail redemptions from Japan Equity Funds, meanwhile, hit a 45 week high as this fund group posted its eighth consecutive week of outflows. Investors ignored data showing that the long awaited rebound based on reconstruction spending may have kicked off in 4Q11, choosing instead to focus on the gloomy outlook for Japanese exporters due to Chinese and Korean competition, the strength of the yen and slowing growth in key markets.

The two major diversified developed markets fund groups, Global and Pacific Equity Funds, had different experiences with the former posting modest inflows for the fourth week running while the latter posted outflows for the first time in five weeks.

Predictions that the price of copper could hit USD10,000 a ton later this year and renewed appetite for gold in the wake of the US Federal Reserve’s guidance on interest rates gave Commodities Sector Funds a shot in the arm in late January. Flows into this fund group jumped to an 11 week high as it posted performance numbers that were double those posted by the second best performer, Healthcare/Biotechnology Sector Funds.

A significant share of the money absorbed by Commodities Sector Funds went into funds specializing in gold and precious metals, reflecting concerns that easing programs and interest rate cuts in both developed and emerging markets will erode the value of fiat currencies.

Real Estate Sector Funds were the other group to see significant inflows, absorbing over USD500 billion and taking over top place YTD. This group has benefited from expectations that the Federal Reserve will focus its efforts this year on stimulating the US housing market.

Energy, Financial, Telecoms, Healthcare/Biotechnology and Consumer Goods Sector Funds recorded outflows for the week while Technology, Infrastructure and Utilities Sector Funds posted modest inflows. 

Bond Funds continued their blistering start to the year by posting record setting inflows during the week ending Feb. 1 as four of the five major bond fund groups absorbed over USD1 billion. Flows into High Yield and Emerging Markets Bond Funds hit 13 and 26 week highs respectively, YTD flows into Global Bond Funds moved north of the USD5 billion mark and Europe Bond Funds extended their longest inflow streak since 2Q10.

Yield was again the major driver of flows, with investors favoring asset classes offering above average returns. Mortgage Backed Bond Funds extended their current inflow streak, which stands at 49 weeks and USD16.1 billion, with USD832 million of fresh money and the strongest weekly inflow in percentage of assets terms among bond fund groups.

Municipal Bond Funds took in USD1.67 billion, their best weekly total since EPFR Global started tracking them in 2006, as investors in US debt rotated out of short and intermediate term funds following the Fed’s signal that short term interest rates are likely to stay at ultra-low levels through 2014.

Flows into Emerging Market Bond Funds favoured funds with hard currency mandates by an almost three to one margin despite concerns about the trajectory of the US dollar and the euro. In terms of geography investors continue to favour funds focused on Emerging Asia, although interest in Latin America Bond Funds has picked up in recent weeks.

Corporate bonds are also attracting solid interest. Europe Corporate Bond Funds attracted fresh money from the fifth consecutive week and Emerging Markets Corporate Bond Funds posted their biggest inflow in over eight months.

 

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