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Expectations of more cheap money shape fund flows going into August

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Fund groups that have struggled since the second quarter attracted fresh interest – and money – in late July ahead of meetings by the European Central Bank and US Federal Reserve that investors hoped would authorise additional quantitative easing.

During the week ending August 1 EPFR Global-tracked Emerging Markets Equity Funds posted their biggest inflow since mid-February, Commodity Sector Funds snapped a five week outflow streak and Russia Equity Funds enjoyed their second best week year-to-date.

The expectation that these central banks will try and drive the price of credit — and hence returns on most assets — even lower also sustained investor interest in riskier, more rewarding fixed income asset classes. High Yield Bond Funds took in over USD1 billion for the seventh straight week, Mortgage Backed Bond Funds absorbed fresh money for the 72nd straight week and YTD flows into Emerging Markets Bond Funds past the USD28 billion mark.

"Since neither meeting gave the markets what they are looking for there’s a good chance this week’s inflows will reverse themselves, especially on the equity side where most of the money went into ETFs" observed EPFR Global research Director Cameron Brandt.

Overall, net flows into all Equity Funds totaled USD6.5 billion while Bond Funds absorbed USD5.84 billion. Money Market Funds recorded net outflows of USD11.72 billion for the week with Europe Money Market Funds accounting for over 90% of the total redemptions.

Despite a 22nd straight week of retail redemptions, EPFR Global-tracked Emerging Markets Equity Funds took in over USD1.5 billion for the first time in over five months as investors factored more US and European quantitative easing into their outlooks for the remainder of 2012. The bulk of this money went into the diversified Global Emerging Markets (GEM) Equity Funds, with Asia ex-Japan and EMEA Equity Funds also attracting over USD100 million apiece.

The flows into EMEA Equity Funds came despite lingering doubts about the Eurozone’s ability to get ahead of its debt crisis which drove redemptions from Emerging Europe Regional Equity Funds to an 11 week high. But hopes that more cheap money will breathe fresh life into commodity prices helped Russia Equity Funds post their biggest inflow since the final week of January.

Brazil and Latin America Equity Funds did not benefit from the flash of optimism about commodities. Policymaking in the region, outside of Mexico and Chile, continues to dull the appetite of investors who fear being caught on the wrong side of capital controls or state action against one of their holdings.

Investors also committed money to Asia ex-Japan Equity Funds for only the second time in the past 14 weeks, in part because China’s slowing economic growth is expected to trigger a strong policy response ahead of the 18th Communist Party Congress this fall which will see a major change in the country’s leadership. China Equity Funds had their best week and extended their longest inflow streak since mid-1Q12.

Flows into EPFR Global-tracked Developed Markets Equity Funds bounced back during the final week of July, driven by the hope that the US and European Central banks would unleash more of their firepower in the battle against slowing growth. Having posted their biggest outflow YTD the previous week, these funds posted collective inflows of USD4.6 billion with US Equity Funds accounting for the bulk of that total.

In keeping with recent history, investors had more faith in the US Federal Reserve than they did in the ECB when it came to pulling the monetary triggers. They pulled money out of Europe Equity Funds for the fourth week running — and ninth time in the past 11 weeks — despite ECB President Mario Draghi’s well received pledge to do what is necessary to preserve the Eurozone. Investors did not completely discount Draghi’s statements: fund groups dedicated to the largest of the so-called PIIGS markets, Spain and Italy Equity Funds, posted their biggest weekly inflows since 1Q11.

US Equity Funds, meanwhile, benefited from solid institutional commitments to Large Cap Funds that more than offset the highest retail redemptions since the third week of May. Value oriented funds outperformed their Growth counterparts across all capitalizations.

Elsewhere, there were signs that after four weeks of lackluster flows the Bank of Japan has resumed it support of Japanese equities. Commitments to Japan Equity Funds hit a five week high, with nearly all the new money going into domestically domiciled Japan ETFs, as a decidedly mixed corporate earnings season rumbled along.

The two major diversified developed markets fund groups ended July with Global Equity Funds posting modest inflows for the third time in four weeks and Pacific Equity Funds recording outflows for the second week in a row.

Hopes of more decisive action by key central banks in early August saw several EPFR Global-tracked Sector Fund groups enjoy better weeks when it came to attracting fresh money. Commodities Sector Funds had their best week since mid-June and flows into Financial Sector Funds hit an 18 week high while both Consumer Goods and Industrials Sector Funds absorbed over USD500 million during the week ending 1 August.

Flows into Commodities Sector Funds were bolstered by renewed interest in gold as a hedge against the currency weakness that might follow further quantitative easing. Funds specializing in gold and precious metals snapped a four week outflow streak. Energy Sector Funds also attracted money despite bellwether BP’s less than stellar second quarter earnings.

Technology Sector Funds continue to struggle, posting outflows for the 15th consecutive week as the earnings season threw up some weak results — among them Microsoft’s first quarterly loss since it went public — and gloomier forecasts thanks to currency headwinds and Europe’s troubles. Real Estate, Infrastructure and Utilities Sector Funds also recorded outflows ranging from USD75 million to USD308 million.

Flows into EPFR Global-tracked Bond Funds held to their recent pattern during the week ending August 1 as yield remained the key goal for many investors. High Yield Bond Funds took in another USD1.4 billion that pushed YTD inflows over the USD43 billion mark — 130% of the existing full-year record — while Mortgage Backed and Municipal Bond Funds extended multi-month inflow streaks and Emerging Markets Bond Funds posted solid inflows for the eighth consecutive week.

Investors were not tempted by one asset class, European sovereign debt, offering better than average yields. Europe Bond Funds posted outflows for the seventh time in the past 10 weeks despite signals from the ECB that it is open to taking more sovereign paper onto its balance sheet. But Global Bond Funds, which on average devote over a third of their portfolios to European debt, recorded inflows for the 27th time in the 31 weeks YTD.

While leery of Europe and its troubles, investors appear sanguine about the trickle of US municipal bankruptcies and what they signal for that asset class. Municipal Bond Funds have taken in USD3.7 billion since the start of the third quarter and nearly USD31 billion YTD. At this point last year this fund group was still reeling from over seven months of sustained redemptions.

While Municipal Bond Funds recorded the biggest inflows among the US Bond Fund sub-groups, there was a noticeable rebound in demand for government debt funds with Long Term Government Bond Funds taking in nearly USD300 million and Intermediate Term Government Bond Funds posting their biggest weekly inflow since the current financial crisis began.

Once again Emerging Markets Bond Funds with hard currency mandates fared better than their local currency counterparts. Asia remains the preferred choice for investors when it comes to regional exposure.


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