With the European Central Bank's quantitative easing program due to kick off in March and Greece's debt problems seemingly kicked four months down the road, investors continued to pile into Europe Equity Funds during late February.
Those tracked by EPFR Global took in over USD4 billion for the fourth time in the past five weeks during the seven days ending Feb. 25 while Greece Equity Funds posted their biggest inflow on record.
While Europe has dominated recent headlines and Europe Equity Funds recent flow numbers, US Bond Funds remain by far the biggest money magnet year-to-date, having pulled in USD46.4 billion versus USD24.6 billion for Europe Equity Funds and USD14.9 billion for Balanced Funds. Overall, EPFR Global-tracked Bond Funds absorbed USD6.91 billion and Equity Funds USD4.9 billion during the week ending Feb. 25 while USD985 million flowed out of Money Market Funds.
Although the focus on Europe has overshadowed the debate over the timing of the first US interest rate hike since 2006, that question remains on the minds of most investors. The recent flows into Inflation
Protected Bond Funds – which included the biggest weekly inflow in over two and a half years in mid-February – suggest that some investors believe the US Federal Reserve may be slipping behind the curve when it comes to price stability.
The combination of the Chinese New Year, uncertainty about oil prices, Greece's debt drama and the desire to hear US Federal Reserve Chairwoman Janet Yellen's testimony to Congress resulted in a week of subdued flows for EPFR Global-tracked Emerging Markets Equity Funds with commitments to Asia ex-Japan and the diversified Global Emerging Markets (GEM) Equity Funds narrowly offsetting outflows from Latin America and EMEA Equity Funds.
For the second week running three country fund groups dedicated to BRICs markets stood out. Ahead of the 2015-16 budget, which is expected to give a clearer picture of Prime Minister Narendra Modi's reform priorities, India Equity Funds absorbed over USD450 million as they extended their current inflow streak to 10 straight weeks. China Equity Funds, meanwhile, saw over USD800 million redeemed as investors sidestepped the disruptions to economic activity and data caused by the New Year's celebrations. The latest allocations data for GEM Equity Funds shows India is now their second largest single country allocation, having climbed past South Korea and Brazil during 4Q14, while China remains the biggest by some margin.
The sharp drop in Brazil's weighting among GEM Equity Funds reflects the tough combination of weaker commodity prices, inflexible labor markets, relatively high inflation and lackluster growth confronting Latin America's largest economy. Investors continue to exhibit cautious optimism that these issues will force Brazil's government to pursue less interventionist economic policies and tackle the deterioration in public finances, with Brazil Equity Funds posting a fourth straight week of modest inflows, their longest such run since 3Q14 when investors were hopeful incumbent President Dilma Rousseff would be unseated by her more market friendly challenger.
Among the EMEA Country Fund groups Russia Equity Funds again fared best as higher oil prices, the shaky ceasefire in the Ukraine and some bottom valuations tempted some investors.
Flows for EPFR Global-tracked Developed Markets Funds during the week ending 25 February followed the pattern that has been in place since mid-January, with strong inflows for Europe Equity Funds, variable flows for Japan Equity Funds and modest outflows for US Equity Funds. The one exception was Global Equity Funds , which posted their biggest inflow on record in cash terms and since early 1Q13 in flows as a percentage of AUM terms.
The week's flows into Europe Equity Funds also stuck to the recent script, with the bulk of the money going to funds with regional mandates while Germany and Greece Equity Funds stood out among the Europe Country Fund groups. While the prospect of QE has boosted investor appetite for exposure to Eurozone markets the impact on the exchange rate confronting UK firms exporting to those markets is weighing on UK Equity Funds which, despite the strong performance of the country's benchmark equities index, have posted outflows seven of the eight weeks YTD. Investors looking at the UK are also beginning to focus on May's general election and the possibility it will return the left of center Labour Party to power.
Japan Equity Funds posted modest inflows as foreign currency flows, which have been flat for some weeks, have picked up. Although Japanese consumers remain in a defensive frame of mind, Prime Minister Shinzo Abe continues to promise significant structural reforms and exports are responding to the more competitive yen.
A less competitive US dollar remains a concern for many US firms, and has added to the headwinds facing US Equity Funds so far this year. Funds with mid-cap mandates continued to swim against the tide during a week when funds managed for growth outperformed their value counterparts across all capitalisations.
Although generally subdued as the 4Q14 earnings season winds down, flows into EPFR Global-tracked Sector Fund groups continued to favour those associated with growth during the week ending 24 February. Two groups with defensive reputations, Utilities and Infrastructure Sector Funds, experienced the biggest redemptions while Commodities, Energy and Technology Sector Funds recorded inflows ranging from USD425 million to USD894 million.
The latest outflows from Utilities Sector Funds, which carried a nine week inflow streak into mid-February, were driven by redemptions from a handful of ETFs. But utilities investors continue to buy into funds focused on water against a backdrop of major droughts in parts of Brazil, the western US and Australia.
Energy Sector Funds have now posted inflows every week year to date, the drop in oil prices and the impact on the profits of energy majors notwithstanding. Among Energy Sector Funds with a narrower focus those dedicated to oil have fared better than those with natural gas or alternative energy mandates.
YTD Healthcare/Biotechnology Sector Funds are the leaders in performance terms, with Telecoms Sector Funds in second spot, while Energy Sector Funds remain the worst performer despite absorbing the most new money.
There was little change to the recent pattern of flows into EPFR Global-tracked Bond and other Fixed Income Funds heading into the final days of February. US Bond Funds again accounted for over half of the total inflows while Balanced, Total Return and High Yield Bond Funds look set to post inflows in excess of USD2 billion for the week. Europe Bond Funds extended their current inflow streaks, as did Emerging Markets Bond Funds which enjoyed their best week since late 2Q14.
At the asset class level Convertible Bond Funds followed up last week's inflow – the biggest in nearly 11 months – by taking in over USD550 million and Mortgage Backed Bond Funds extended an inflow streak stretching back to mid-October.
Flows into Europe Bond Funds were slightly off the pace of the previous three weeks as investors began to focus on the mechanics of the ECB's QE program and what it will do to the supply and demand equation for investment grade debt in Europe. Flows into Europe High Yield and Investment Grade Corporate Bond Funds have been consistently strong since the ECB announced the program in late January, with flows into the latter outpacing flows into HY Funds in recent days.
US Bond Funds , meanwhile, continue to see the greatest interest in groups with multi-asset, high yield, intermediate and long term mandates. Flows into Municipal Bond Funds, which saw a 21 week inflow streak snapped the previous week, bounced back.
Investors looking at emerging markets again gravitated towards Hard Currency Emerging Markets Bond Funds. They also rebuilt some exposure to a couple of the less popular markets in recent months, Brazil and Russia, with Brazil and Russia Bond Funds posted their biggest inflows since early January and late 4Q13 respectively.