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Equity fund flows turn negative but global bond funds shine

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With central banks around the world shifting their focus to winding down the extraordinary measures taken over the past year and unemployment rates continuing to climb, investors spent the first few days of November wondering what will drive economic growth in 2010.

With no clear answer, only six of the 24 major EPFR Global-tracked sector and fixed income fund groups tracked by EPFR Global recorded inflows despite the additional liquidity created by another week of hefty outflows from money market funds.

Although some of the more conservative fund groups fared well, with global bond funds taking in fresh money for a 30th consecutive week and US bond funds absorbing over USD2bn for the 14th week in a row, high yield and emerging markets bond funds saw their latest inflow streaks snapped while outflows from Europe and all EM equity funds hit 17 and 11 week highs respectively.

Overall, fixed income funds took in a net USD3.63bn for the week ending 4 November 4 – their worst showing since early July – while equity funds posted collective outflows of USD5.42bn.

All four of the major emerging market equity fund groups posted outflows for the first time since the third week of June as risk aversion rose amidst questions about the validity of current valuations. Global emerging markets equity funds surrendered USD539 m, with EMEA, Asia ex-Japan and Latin America equity funds also recording modest outflows. 

Fresh doubts about the health of banks based in developed Europe, whose subsidiaries play a key role in financing Eastern European and Baltic economies, weighed on sentiment towards the EMEA region with emerging Europe equity funds posting outflows for the first time in 16 weeks and redemptions from Russia equity funds hitting a year-to-date high.

Most of the Asia ex-Japan subgroups were also tapped by investors worried about the source of demand for the regions exports going into 2010. Outflows from China equity funds totalled USD270m and redemptions from India equity funds of USD82m for the week was the biggest weekly outflow year to date. Brazil equity funds saw their seven week inflow streak snapped, but BRIC equity funds extended their inflow streak to eight straight weeks.

Investors continued to take the diversified approach to developed markets during the week, with global equity funds the only one of the five major fund groups that invests primarily in these markets to post inflows. Worries about tighter credit conditions weighed heavily, with central banks talking about exit strategies from the ultra-easy policies of the past 12 months despite the fact key private institutions are still very publicly repairing their balance sheets.

EPFR Global-tracked Europe equity funds had their worst week since the one ending 8 July, with investors pulling USD535m out of this fund group ahead of the European Central Bank’s decision to keep interest rates on hold. Rising unemployment in the Eurozone, which now stands at a ten-year high, and weak September retail sales figures reinforced investor concern that any recovery next year will be modest at best.

Weak domestic demand, with deflation regaining its grip as Japanese consumers respond to a sour labor market and stagnant wages, is also calling the pace of Japan’s recovery into question. Japan equity funds recorded their seventh straight week of outflows as the YTD tally climbed over the USD5bn mark. Regional money market funds, however, are clearly benefiting from the fact that deflation makes holding cash more attractive.

US equity funds, meanwhile, posted outflows for the fifth time in the past six weeks despite Warren Buffet’s USD26bn vote of confidence in the long-term prospects for the US economy and the government’s extension of the new homebuyer credit. US small cap funds bore the brunt of this week’s outflows amidst doubts that their struggle for access to bank loans will end any time soon. But, in a reversal from the previous week, US growth funds outperformed their value counterparts across all capitalizations (small-cap, mid-cap and large-cap).

Pacific equity funds, the other major developed markets diversified fund group, posted outflows for the first time in ten weeks against a backdrop of rising Australian interest rates and questions about Japan’s prospects.

Further recapitalization of UK banks, bad results from Europe, the bankruptcy of US lender CIT and Australia’s interest rate hikes heaped pressure on the financial sector in early November. That was reflected in the USD798m outflow from EPFR Global-tracked financial sector funds, their biggest since the fourth week of March, and its impact spilled into fund groups investing in sectors dependent on consumer credit. Technology sector Funds and Consumer Goods Sector Funds also posted outflows of USD226m and USD216m respectively.

Anticipation of a weaker dollar did keep the spotlight on commodities, with India’s recent USD6.7bn gold purchase to hedge its foreign reserves boosting the price of that precious metal to fresh record highs. Commodity sector funds extended their current inflow streak to nine straight weeks as the YTD total moved north of USD11bn. Elsewhere, regulatory concerns helped to shape flows, with utilities sector funds and energy sector funds posting outflows while healthcare/biotechnology sector funds recorded a sixth straight week of redemptions as the debate over healthcare reform in the US continued at a high pitch.

With investors using safety with a reasonable yield as their yardstick going into November, the riskier fixed income fund groups struggled to attract any of the cash being pulled out of EPFR Global-tracked money market funds. Investors removed money from high yield bond funds for the first time in 19 weeks and ended emerging markets bond funds seven week, USD4.6bn inflow streak.

US bond funds retained their allure, absorbing another USD2.1bn as YTD inflows surpassed USD72bn. Funds investing in short-term debt again led the way, with intermediate term and municipal bond funds also attracting solid flows. Investors also gravitated to global bond funds, which have now absorbed USD23bn YTD, and extended the streak of balanced funds (which invest in bonds and equities) to 31 straight weeks.

Outflows from money market funds rebounded to USD27.3bn for the week. The USD444bn redeemed YTD now exceeds the total inflows for all of 2008.

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