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Fund flows show investors still risk averse

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Flows into and out of EPFR Global-tracked funds during the week ending May 25 mirrored those of the week before as investors, their confidence battered by Greece’s debt problems and weaker growth in key markets, remained on the defensive.

 

That meant another week of solid inflows for Bond and Money Market Funds, another week of outflows for both Developed and Emerging Markets Equity Funds and aggressive profit-taking from some of the fund groups that have rebounded strongly since mid-March.

Daily data showed some signs of a recovery in risk appetite as the week progressed, with Commodity Sector Funds snapping a three-week outflow streak and US Municipal Bond Funds posting their biggest daily inflow since February 2.

Overall, Equity Funds posted collective outflows for the week of USD9.27 billion as they extended their longest outflow streak since late 3Q10 while Bond Funds took in a net USD4.53 billion. Money Market Funds absorbed USD7.94 billion as commitments to US funds more than offset the biggest weekly redemptions from Europe-based funds since the last week of March.

Emerging Market Equity Funds posted their second straight week of outflows going into the final week of May as retail investors picked up the pace of their redemptions. Year to date these funds have lost USD8.6 to investor outflows. Concerns about the impact of Eurozone debt crisis on regional growth and the willingness of richer European countries to support the development of poorer ones hit EMEA Equity Funds hard, with redemptions hitting a 144 week high, while weaker US and Chinese data took its toll on Latin America and the diversified Global Emerging Markets (GEM) Equity Funds.

Asia-ex-Japan Equity Funds were the only major emerging markets fund group to post inflows during the week as some investors decided that the recent correction has created some value. Exporters expected to benefit from the hobbling of Japanese rivals hit hard by the March 11 earthquake fared best, with Taiwan Equity Funds having their second best week year-to-date and Korea Equity Funds posting inflows for the ninth time in the past 10 weeks. That helped offset the biggest weekly outflow from Greater China Equity Funds since early 2Q10 and the end of Thailand Equity Fund

Among the EMEA Equity Fund sub-groups, Russia Equity Funds experienced their second straight week of above average redemptions as questions about oil demand and the possibility of a real — and uncertain — contest between incumbent Dmitry Medvedev and Prime Minister Vladimir Putin over the presidency next year prompted investors to book gains and move to the sidelines.

The outflows from Russia Equity Funds capped another bad week in what has been a generally bad year for funds that invest in the four BRIC (Brazil, Russia, India and China) markets. While funds investing in Russia have fared well until recently, China, Brazil, India and dedicated BRIC Equity Funds have posted YTD outflows ranging from USD449 million to USD2.6 billion.

EPFR Global-tracked Developed Markets Equity Funds headed into the final days of May having suffered their biggest weekly outflow since mid-August as a toxic combination of weak macroeconomic data, higher inflation in key markets and political posturing prompted investors to pull back from this asset class. Retail redemptions hit their highest level in exactly a year.

Japan Equity Funds posted outflows for the seventh time in the past nine weeks as companies struggle to restore their supply chains damaged by the March 11 earthquake and the government struggles to come up with a credible rebuilding plan while fending off efforts to unseat it. Political uncertainty, the recent spike in the value of the yen, higher oil prices, doubts about short-term electricity supplies and the degree to which regional competitors will be able to grab market share from Japanese companies hobbled by the twin disasters in March are among the factors complicating any assessment of Japan’s prospects.

In the US the partisan manoeuvring around the federal debt limit, the impending end of the Federal Reserve’s QE2 program and lacklustre GDP, employment and consumption data combined to keep the pressure on US Equity Funds. They posted outflows for the third consecutive week, their longest run since 3Q10.

Politics and its impact, for better or worse, on efforts to resolve the Eurozone debt crisis occupied investors making decisions about their European exposure in late May. Outflows from Europe Equity Funds hit a 10-week high as resistance mounted in Greece to fresh austerity measures and the European Central Bank signalled its desire to continue normalizing monetary policy despite the implications for heavily indebted Eurozone countries.

Global Bond Funds, which on average allocate a third of their portfolios to developed Europe, posted their biggest outflow in 52 weeks, dropping the YTD figure to USD22.6 billion. But Pacific Equity Funds, the other major diversified developed markets fund group, snapped a three week losing streak.
 
The fourth week in May saw a flows into EPFR Global-tracked Global Sector Funds Commodity Sector Funds turn positive for the first time this month as bargain hunting, accelerating inflation in the US and Europe and some optimistic brokerage reports attracted fresh money to a fund group that surrendered nearly USD5 billion during the preceding three weeks. Energy Sector Funds also benefited, posting modest inflows as institutional commitments outweighed retail redemptions.

Retail investors also pulled money out of Financial Sector Funds for the 11th straight week, contributing to their biggest weekly outflow in over 14 months, as investors tried to get a fix on "the new normal" for a sector facing higher regulatory burdens, the real bills for Japan’s earthquake and some major US tornados, an end to quantitative easing in the US and Europe and a possibly "haircut" on holdings of Greek, Irish and Portuguese sovereign debt.

Healthcare/Biotechnology Sector Funds also had a tough week as institutional redemptions hit their highest total in over a decade. Profit taking appears to have been the driver: the funds had gained over 14% since mid-March.

Real Estate, Consumer Goods Technology and Utilities Sector Funds ended the week posting inflows ranging from USD11 million to USD297 million while Telecom Sector Funds recorded modest outflows.

For the fourth straight week EPFR Global-tracked bond funds took in around USD4 billion with Global and US Bond Funds accounting for an increasing percentage of that total. During the week ending May 25 flows into Global Bond Funds hit a 55 week high while US Bond Funds had their best week since late October. Also in keeping with the recent pattern were the outflows from US Municipal and European Bond Funds and fair-to-good flows into funds offering some mixture of inflation protection and better than average yield.

High Yield Bond Funds recorded inflows of the ninth straight week. Total Return Funds took in fresh money for the 21st time in the 22 weeks YTD. And Floating Rate Funds extended an inflow streak that stretches back to 2Q10. Inflation Protection Bond Funds maintained their record of absorbing new money every week of the year so far while US Mortgage Backed Bond Funds posted their 11th straight week of inflows, their best run since a 37 week streak ended in early December, as yield hungry but safety conscious retail and institutional investors look for alternatives to US Treasuries.

Despite posting back-to-back daily inflows for the first time since early December, Municipal Bond Funds ended the week having extended their current outflow streak to 28 weeks and USD41.5 billion as retail investors continue to pull money out of these funds. Recent weekly outflows, though, have been much less severe than strong weekly outflows that have been a feature of these funds since last November. "The recent decline in yields suggests that retail investors are coming back to this market," noted Cameron Brandt, EPFR Global’s Research Director.

Europe Bond Funds also added to their poor run since early October. But the trend since mid-April, while still negative, has been improving with institutional investors committing money to these funds for the second week running.

Flows into Emerging Markets Bond Funds, which have now posted inflows for nine straight weeks, swung back in favour of those with local currency mandates. Flows into funds with a geographic focus on Latin America have gained momentum since the beginning of 2Q11 but still lag their Asia ex-Japan counterparts with EMEA funds well off the pace.

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