The final week of August saw flows into EPFR Global-tracked Equity Funds stage a modest rebound on the back of bargain hunting and optimism that the US Federal Reserve will pull the trigger on another round of quantitative easing. But most of the fresh money flowed towards funds associated with "safe haven" markets or defensive sectors, and investors showed a strong preference for the flexibility offered by ETFs as actively managed equity funds posted collective outflows for the eighth consecutive week.
Overall, Equity Funds took in a net USD6.02 billion during the week ending August 31 — their best showing since the first week of July — with US and Germany Equity Funds accounting for nearly all of these inflows. Money Market Funds absorbed a modest USD3.12 billion while Bond Funds had collective outflows of USD791 million for the week.
Risk appetite and retail investors remained in short supply and equity funds with a focus on dividend paying stocks again stood out when it came to attracting fresh money. But redemptions from Emerging Markets Equity and High Yield Bond Funds continued to slow and Technology Sector Funds snapped a seven week outflow streak.
Hope that US monetary authorities will unveil QE3 before the end of the year helped staunch the bleeding from EPFR Global-tracked Emerging Markets Equity Funds during the final week of August. Although all four of the major EM fund groups posted outflows, the collective total of USD590 million was the lowest in a month that has seen nearly USD8 billion redeemed from Asia ex-Japan, Latin America, EMEA and the diversified Global Emerging Markets (GEM) Equity Funds.
The prospect of stronger US demand for Asian exports helped Korea and China Equity Funds snap three week outflow streaks, with flows into the latter climbing to an eight week high. But India Equity Funds were hit with redemptions for the 17th time in the past 18 weeks as another spike in food inflation cooled hopes of an end to the Reserve Bank of India
Another of the BRIC markets, Brazil, delivered a surprise interest rate cut to go with a solid rebound by its equity markets. But investors pulled money out of Brazil Equity Funds for the fifth straight week as Latin America Equity Funds suffered net redemptions for the 11th time in the past 12 weeks. A combination of dependence on commodity exports to China and the US, high inflation in some markets and the willingness of regional policymakers to adopt capital controls has sapped investor enthusiasm for the region since the beginning of the year.
Some of the same factors lie behind EMEA Equity Fund 17-week outflow streak, which has been compounded by the civil strife in the Middle East and North Africa and fears that the Eurozone debt crisis could take a toll on the CE3 nations, Russia, the Baltic Republics and Turkey. Among the EMEA sub groups, Russia, Africa Regional, Emerging Europe Regional and Middle East and Africa (MEA) Equity Funds carried outflows streaks of eight, 12, 17 and 24 weeks respectively into September.
More attractive valuations and expectations of further monetary stimulus saw over USD6 billion flow back into US Equity Funds during the week ending August 31, taking inflows over the past two weeks over the USD11 billion mark. But the other major developed markets equity fund groups again struggled to attract new money as investors wait to see what policymakers come up with when they return from their summer recesses.
In the case of US Equity Funds, over 95% of the fresh money flowed into ETFs. What money was absorbed by actively managed funds was limited to those with Mid-Cap mandates. "One of the ETFs that absorbed the most money has seen short interest climb by over 50% during the past two weeks, so it’s premature to call these flows a vote of confidence in US prospects," noted EPFR Director of Research Cameron Brandt. Year-to-date outflows for US Equity Funds now stand at USD28 billion, a swing of over USD60 billion since early May when cumulative inflows were north of USD35 billion.
Europe Equity Funds also posted inflows during the week. But, as has been the case for much of the year, institutional commitments to Germany Equity Funds offset a 14th consecutive week of retail redemptions from most other sub-groups. Worries about the ongoing Eurozone debt crisis have been compounded in recent days by a string of weak macroeconomic numbers.
Institutional commitments to domestically domiciled funds have been a key component of recent flows into Japan Equity Funds. But, during the last week of August, that was not enough to offset redemptions — especially by European investors — as the country changed prime minister for sixth time since 2006 and its exporters railed against the strength of the yen.
Global Equity Funds posted outflows for the seventh time in the past eight weeks but Pacific Equity Funds, the other major diversified developed markets fund group, posted their biggest inflow since the second week of 4Q10.
During the final week of August investors continued to gravitate towards the perceived defensive qualities and dividend payments offered by Utilities Sector Funds. Over the past three weeks YTD flows into this fund group have climbed past the full-year record of USD1.38 billion set in 2006.
Hopes that cash-rich tech companies will return more of that money to shareholders was also a factor in the ending of Technology Sector FundsFinancial Sector Funds attract modest amounts of fresh money despite the potential insurance bills for Hurricane Irene and persistent speculation that European banks remain significantly undercapitalised.
With austerity measures biting in many developed markets, Healthcare/Biotechnology Sector Funds posted outflows for the sixth straight week as investors continued to pencil in reduced reimbursement rates from publicly funded healthcare programs.
Commodities and Energy Sector Funds also experienced significant redemptions thanks to declining confidence in the short-term outlook for the global economy. "Our daily data is showing some response to the speculation about QE3," noted Brandt. "Flows may well pick up a bit ahead of the Fed’s hoped-for announcement later this month."
Flows into — and out of — many of the major EPFR Global-tracked bond fund groups were subdued in late August as investors wait for key fiscal and monetary policy decisions they expect during this month and next. Outflows from High Yield Bond Funds slowed to a five week low, flows into Emerging Markets Local Currency Bond Funds fell to their lowest level since the third week of March and redemptions from Europe Bond Funds were around half of the YTD weekly average.
In dollar terms US Bond Funds saw the biggest outflows as investors pulled money out of Floating Rate, Inflation Protection, Municipal and Intermediate Bond Funds. Some of that money was rotated into US Short Term Government Bond Funds, which posted their biggest weekly inflow in over four years.
Municipal Bond Funds, which had pulled out of a lengthy slump going into 3Q11, have now posted outflows for six straight weeks despite still low default rates and a marked drop-off in new issuance. The modest rebound in flows was driven by institutional investors who have pulled back again during the past four weeks.
Among the fund groups organised by geography, Europe Bond Fund flows are beginning to mirror their equity counterparts, with institutional interest in Germany Bond Funds partially offsetting retail flight from the overall asset class. Flows into Germany Bond Funds have now been positive for 11 straight weeks and 16 of the past 17, with the most recent commitments taking the YTD total into positive territory.
Among Emerging Markets Bond Funds those whose geographic focus is Asia continue to outstrip Latin America and EMEA Bond Funds by an eight-to-one margin when it comes to attracting fresh money.