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Global commodity funds keep soaking up fresh cash

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Investors continued to seek protection from the slumping dollar during the week ending 18 November by pumping money into emerging markets assets and commodities and diversifying their geographic exposure, according to a report by EPFR Global.

Commodity sector funds enjoyed their best week in over three and a half years, while global emerging markets equity and global bond funds both absorbed over USD1.7bn.

Meanwhile, emerging markets bond funds posted their second highest weekly inflow tally since EPFR Global started tracking them, with particularly strong investor interest in the EM local currency bond funds on further expectations of emerging markets currency appreciation.

The expectation that US interest rates will stay low in order to sustain that country’s fragile recovery, while bad for the dollar, did bolster hopes for growth in the US and many of the countries that export to it.

US equity funds, China equity funds and Asia ex-Japan equity funds all recorded solid inflows for the week. All equity funds took in a net USD5.98bn for the week, of which emerging markets equity funds accounted for some 49 per cent, while all bond funds absorbed USD5.66bn.

Investors pulled just USD740m from money market funds during the week, taking year-to-date outflows up to USD452bn.

Inflows for all emerging market equity funds tracked weekly now stand at USD56.8bn, keeping them firmly on track to eclipse the USD50bn record they set during 2007. At the same point last year collective net outflows stood at USD40bn. And including funds that report only monthly, total net inflows into all emerging market equity funds is around USD71bn.

Global emerging market equity funds remained the biggest money magnets among the major emerging markets fund groups for the week as investors sought a geographically diversified exposure to the asset class. Monthly data from October also reflected this, with flows into GEM funds exceeding those of the other three major fund groups combined as they hit their highest monthly total since early October 2007.

China equity funds and Asia ex-Japan equity funds both benefitted from strong Chinese data released the previous week, with the former taking in USD542m – a 27-week high – while the latter saw YTD inflows push over the USD17bn mark. Flows into the other BRIC fund groups were modestly positive, with dedicated BRIC equity funds taking in USD205m for the week and Brazil, India and Russia equity funds between USD42m and USD134m. Elsewhere, Latin America equity funds took in another USD168m and EMEA equity funds USD94m.

EPFR Global-tracked US equity funds managed to shrug off a week of lackluster data and lectures from both home and abroad about the swelling deficit to record a consecutive week of inflows for only the third time so far this year. US large cap ETFs again accounted for the bulk of the inflows, which totaled USD1.97bn, with growth Funds getting more fund flows than value funds.

Flows into Europe equity funds were also positive for the second week in a row and the eighth time in the past 11 weeks as key equity indexes climbed to a 13-month high thanks to valuations that still appear attractive and a formal end to the Eurozone’s recession. But exporters are feeling the pinch from the strength of their currency versus the dollar.

Despite a second consecutive quarter of growth in Q3 2009, investors remain leery of Japan where a new government is trying to shape an economic policy that will combat deflation, encourage domestic consumption and restore the credibility of the country’s public finances. Japan equity funds posted their ninth consecutive week of outflows as the prospect of more corporate issues in the weeks ahead pushed the benchmark Nikkei-225 equities index down to a six month low.

Diversified fund groups again fared well, with global equity funds taking in USD865m as they extended their current winning streak to 18 consecutive weeks. Pacific equity funds, the other major diversified fund group, took in USD86m for the week with Australia’s commodities story again a major driver.

Commodity sector funds continued their strong YTD run in mid-November as the price of gold and other precious metals climbed higher, with dollar weakness and Chinese demand the main drivers. This fund group, which currently accounts for nearly three-quarters of the inflows into all sector fund groups so far this year, took a record-setting USD1.34bn for the week as YTD inflows climbed north of USD13bn. Funds investing in physical commodities, rather than the equities of commodity producers, dominated the action among the commodity funds. Two gold ETFs, a silver ETF, an oil ETF and a natural gas ETF accounted for USD856m of the net inflows.

Although oil prices also broke through the USD80 a barrel mark the other sector fund group that has benefited from the search for hedges against dollar weakness, energy sector funds, posted a modest outflow for the week as some investors refocused on the likelihood of a double-dip recession. That shift benefited sector fund groups viewed as defensive: utilities, telecom and healthcare/biotechnology sector funds all recording inflows during the week ranging from USD116m to USD16m.

Emerging markets bond funds, which posted their biggest monthly inflow during October since EPFR Global started tracking this fund group in Q1 1995, pulled in another USD963m during the third week of November as appetite for exposure to fixed income assets held up in the face of heavy sovereign and corporate issuance. Global bond funds also set a new monthly inflow record in October, absorbing USD17.4bn, and have taken in an average of USD1.74bn a week so far during November.

US bond funds, meanwhile, maintained their record of posting inflows every week YTD as they took in over USD2bn for the 16th straight week. Short term and inflation protection funds accounted for roughly half of the total inflows, with funds investing in long term and intermediate government debt both recording modest outflows. Flows into high yield bond funds hit a 14-week high of USD744m as the prospect of low interest rates in the US and Europe  well into next year increased investor comfort with this asset class.

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