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Equity fund flows hold up in the face of mixed earnings

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Although many equity markets took something of a breather in early August following their charge in late July, flows into EPFR Global-tracked equity funds hit a one year high for the se

Although many equity markets took something of a breather in early August following their charge in late July, flows into EPFR Global-tracked equity funds hit a one year high for the second week running as investors continued pulling cash out of money market funds.

In doing so, they showed an increased appetite for diversified exposure and for exposure to developed rather than emerging markets, according to EPFR Global.

During the week ending 5 August over USD24bn was removed from money market funds, taking year-to-date outflows well over the USD200bn mark, while USD9.56bn found its way into equity funds – of which those investing in developed markets accounted for nearly USD8bn – and USD3.94bn into other fixed income fund groups.

Overall 20 of the 24 major equity, sector and fixed income fund groups tracked by EPFR Global posted inflows. Among the fund groups that stood out were US bond funds, which took in over USD2bn for the first time YTD, and global equity funds which saw YTD flows turn positive for the first time since the second week of January.

Asia ex-Japan equity funds remained the biggest money magnets among the four major EPFR Global-tracked emerging market equity fund groups during the first week of August, with the diversified global emerging markets equity funds absorbing USD424m, Latin America equity funds USD203m and EMEA equity funds USD105m.

While flows into BRICs markets and BRIC equity funds remained solid, China’s role was not as pronounced in early August, with China equity funds taking in a net USD18m compared to USD45m for Russia equity funds, USD89m for Brazil equity funds and USD125m for India equity funds. The inflow streak for dedicated BRIC equity funds, meanwhile, now stands at 20 weeks and USD2.43bn.

EMEA equity fund flows were helped by a recovery in sentiment towards Emerging Europe fuelled, in part, by some better than expected earnings reports from banks in developed Europe whose subsidiaries play a key role in financing Eastern European and Baltic economies.

The glow generated by encouraging news about house prices, better than expected jobless claims numbers and a generally encouraging 2Q09 corporate earnings season helped EPFR Global-tracked US equity funds post solid inflows for the second straight week in early August.

The prospect of a healthier US economy also encouraged investors to commit fresh cash to Japan and Europe equity funds during the week ending 5 August. In the case of Europe equity funds, the USD964m they absorbed was the most since the second week of May. In addition to hopes of better days ahead for the regions exporters, investors were also responding to some stronger than expected earnings numbers from major banks and insurers. Japan equity funds posted their sixth straight week of inflows as they extended their best run since late 2Q08 as key leading indicators moved higher and economists predicted three per cent- to four per cent quarter-on-quarter growth for the three months ending 30 June.

Leading indicators for the US are also rising, although investors appeared to be in several minds about the strength of the rebound when it comes. For the second week running large cap equity funds attracted more than half the new money as funds managed for value outperformed their growth counterparts across all capitalizations.

Elsewhere, flows into global equity funds accelerated for much of the week as appetite for diversified exposure increased. They absorbed a net USD1.66bn – their best showing since the third week of May 2008 – while the other major diversified fund groups investing primarily to developed markets, Pacific equity funds, took in USD85m.

Some more pleasant surprises on the earnings front, especially in Europe, were reflected in the USD877m absorbed by EPFR Global-tracked financial sector funds during the first week of August. That represented their biggest weekly inflow since the second week of October. Signs of life in the US housing market, which helped real estate sector funds attract USD221m, also played a role.

Against a backdrop of spikes in the prices of oil and other commodities, commodity and energy sector funds absorbed USD364m and USD103m respectively, while technology sector funds took in another USD199m for the week. Funds investing in the more defensive sectors did not fare as well. Investors pulled USD147m out of consumer goods sector funds, USD42m out of utilities sector funds and USD11m out of healthcare/biotechnology sector funds.

Fixed income funds continued to shine going into August despite the growing supply of both sovereign and corporate debt hitting world markets. EPFR Global-tracked balanced, emerging markets and global bond funds extended inflow streaks of 17 weeks or more, US bond funds maintained their record of absorbing fresh money every week YTD and high yield bond funds saw YTD inflows climb over the USD15bn mark.

Municipal, short term and inflation protected bond funds accounted for USD1.59bn of the USD2.07bn that flowed into all US bond funds ahead of a week when the US Treasury will action off a record-setting USD75bn worth of new debt.

Emerging markets are also filling the debt pipeline, so far without dampening investor appetite: the spread between US Treasuries and JP Morgan’s benchmark EMBI+ index recently dropped below 350 basis points. Funds investing in local currency issues again accounted for over half of the net flows into EPFR Global-tracked emerging markets bond funds.

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