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Greece debt deal uncertainty prompts investors to tap the fund flow brakes

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Investors maintained their search for better-than-average returns during mid-February. But they did so in the face of some headwinds, ranging from Greece’s debt woes to geopolitical tensions in the Middle East, which robbed flows into several major fund groups of their recent momentum.

Emerging Markets Equity Funds took in less than half their previous weeks total and Emerging Markets Bond Funds less than a third while Europe Bond Funds posted outflows for the first time in six weeks. Among dedicated sector funds only the Real Estate/Property funds saw net inflows in the latest week.

Overall, EPFR Global-tracked Equity Funds recorded collective outflows during the week ending February 15 of USD1.7 billion — their worst showing since the first week of January — as redemptions from Developed Market Equity Funds more than offset the USD2.2 billion committed to Emerging Markets Equity Funds. Flows into Bond Funds totaled USD7.03 billion while USD6.3 billion flowed out of Money Market Funds.

Year-to-date investors have returned just over 40% of the USD47 billion they pulled out of Emerging Markets Equity Funds during 2011. "If you compare cumulative flows since October with the same period during 2010-11, it appears that investors have "flipped" their overall strategy — the flows are almost mirror opposites," observed EPFR Research Director Cameron Brandt.

Emerging Market Equity Funds enjoyed another solid week, although it paled in comparison to the previous week’s USD5.8 billion inflow, with the diversified Global Emerging Markets (GEM) Equity Funds again accounting for the lion’s share of the total.

Among the major regional fund groups, Asia ex-Japan Equity Funds fared best as faith in a "soft landing" for China held up despite evidence that export volumes fell sharply going into the New Year. China Equity Funds posted their sixth straight week of inflows, taking YTD inflows over the USD1.8 billion mark. Elsewhere, a sharp drop in the inflation rate helped India Equity Funds enjoy their biggest weekly inflow since mid-October, 2010, as investors penciled in additional interest rate cuts, while Taiwan Equity Funds experienced their second straight week of heavy redemptions.

Despite the uncertainty stemming from Greece’s struggles to comply with the terms being demanded for additional support, EMEA Equity Funds extended their longest inflow streak since 2Q11 as Russia’s oil story attracted some fresh money which offset redemptions from Emerging Europe, Egypt and South Africa Equity Funds.

Flows into Latin America Equity Funds favored Mexico, the regional market whose fortunes are most tightly linked to the slowly recovering US economy. Outflows from Brazil Equity Funds hit a five week high as a string of disappointing 4Q11 earnings reports took their toll and Colombia Equity Funds posted their biggest outflow since late July.

While China Equity Funds are the YTD leaders in dollar terms among country funds, when inflows are measured as a percentage of assets under management they drop to sixth behind Philippines, Chile, Indonesia, Thailand and South Africa Equity Funds. Flows into Philippines Equity Funds through mid-February are equal to 27% of their AUM on January 1.

The inability of Greece to nail down a deal on the next round of bailout funding, lackluster Japanese corporate earnings reports and growing doubts the US Federal Reserve will unveil another quantitative easing program later this year prompted developed market investors to take some of the YTD gains off the table during the second week of February.

Outflows from US Equity Funds jumped to a nine week high as retail investors extended their redemption streak to 43 consecutive weeks. Small Cap and Dividend Equity Funds did attract fresh money but Mid Cap Equity Funds saw their five week inflow streak snapped. Funds with a Growth style again, outperformed their Value counterparts across all capitalizations, the fifth week in a row they have done so.

Europe Equity Funds saw most of the money that flowed in the previous week flow back out as Greeks rioted against the latest round of austerity measures and ratings agency Moody’s indicated over a hundred regional banks could be downgraded. France Equity Funds recorded outflows for the 10th straight week and Germany Equity Funds suffered net outflows for the sixth time in the seven weeks YTD for total cumulative outflows of USD540.6 million.

Japan Equity Funds also extended their outflow streak to 10 straight weeks. Outflows YTD have now moved beyond the USD1 billion mark, even though portfolio performance for these funds is up by nearly 10%. A disappointing earnings season that has highlighted the competitive burden the strong yen is imposing on exporters has taken its toll on investor sentiment, as has the latest spike in oil prices at a time when much of Japan’s nuclear generator capacity remains off line.

The two major diversified developed markets fund groups both took in new money, with flows into Global Equity Funds hitting a 16 week high and Pacific Equity Funds posting inflows for the sixth time in the past seven weeks. 

EPFR Global-tracked Sector Funds ran into some profit taking in mid-February as higher oil prices and the latest twists in the long-running Eurozone debt crisis cooled assumptions about global growth during 2012. Real Estate Sector Funds were the only one of the 10 major sector fund groups to take in fresh money, extending their current inflow streak to six weeks and USD2.74 billion.

Of the other nine, Financial Sector Funds saw the biggest outflows with investors redeeming an 11 week high of USD497 million. The threat of more downgrades, the Fed’s efforts to cool expectations of further quantitative easing and continuing threat of a disorderly Greek default are among the headwinds facing this sector.
Commodities, Energy, Utilities and Consumer Sector Funds also posted outflows in excess of USD200 million during the week ending Feb. 15, while Infrastructure, Telecom, Healthcare/Biotechnology and Technology Sector Funds experienced net redemptions ranging from USD6 million to USD67 million.
Year to date, Technology Sector Funds have been the best performers, with collective portfolio gains of nearly 14%, followed by Financial, Commodities and Healthcare/Biotechnology Sector Funds.

Bond Funds extended their strong start to the year during the second week of February, although flows tilted noticeable towards US Bond Funds as risk aversion climbed a couple of notches. Investors are still putting a high priority on returns, with High Yield Bond Funds pulling in over USD2 billion for the fourth consecutive week. But flows into Emerging Market Bond Funds slipped after accelerating for three straight weeks and Europe Bond Funds experienced their biggest outflow since the third week of December.

Year to date inflows into High Yield, US, Emerging Markets and Global Bond Funds now stand at 190%, 57%, 27% and 20% of their full year totals for 2011.

Flows into US Bond Funds, which jumped to a 12 week high and accounted for 80% of all bond fund flows, again favoured asset classes that promised high returns. Over USD1 billion flowed into US Municipal Bond Funds while Long Term and Intermediate Term Corporate Bond Funds both set weekly inflow records in dollar terms.

Emerging Market Bond Funds flows once again favored funds with hard currency rather than local mandates, but the margin dropped from 3:1 the previous week to around 2:1. Retail redemptions from local currency funds climbed to a nine week high.

At the asset class level Total Return Funds extended their current inflow streak to seven straight and Floating Rate Funds posted modest inflows for the fourth time in the past five weeks while Inflation Protected Bond Funds posted outflows for the first time YTD.

Balanced Funds, which invest in both fixed income assets and equities, took in fresh money for the sixth time in the past seven weeks. YTD inflows stand at USD607 million versus USD5.3 billion for the comparable period last year.
 

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