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High Yield funds trampled as rising risk aversion chases money into US Equity and Bond Funds

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Flows into US Equity Funds jumped to a one year high during the week ending 15 June while US Bond Funds, despite the outflows from the US high yield funds, enjoyed their second strongest week year-to-date, according to the latest data from EPFR.

High Yield Bond Funds, including funds investing mainly in US and European issues, posted their second largest weekly outflow on record as investors withdrew USD2.09 billion from these funds. The weekly outflows were only exceeded by redemptions in the week ending May 26, 2010. However, outflows as a percentage of total assets for the fund group were about 1%, considerably less than two weeks of outflows last May as investors fled the asset class.  

Overall, EPFR Global-tracked Equity Funds took in USD6.03 billion as the inflows recorded by a small group of US ETFs — which often see dramatic flow activity in the days leading up to options expirations as is the case on June 17 — offset net redemptions from all the other major equity fund groups. Bond Funds extended their current inflow streak to 17 straight weeks as they collectively absorbed USD679 million for the week.

In contrast to mid-2Q10, however, inflation is an issue in both emerging and developed markets. So there was no rush to park more cash in ultra-low yielding Money Market Funds. Instead, these funds experienced their highest weekly outflow in over four months.
 
With the outlook for major developed markets deteriorating and inflation keeping the pressure on monetary policymakers in China, India and Brazil, EPFR Global-tracked Emerging Markets Equity Funds experienced another week of tepid flows that ended with all four of the major fund groups posting modest outflows. Redemptions from the geographically diversified Global Emerging Market (GEM) Equity Funds were the largest in both dollar and percentage terms.

At the country level India Equity Funds recorded their seventh straight week of outflows — and their biggest since late March — ahead of another interest rate hike by its central bank aimed at curbing an inflation rate running at over 9%. Above target inflation in Brazil and Russia did not, however, stop investors from committing fresh money to Russia Equity Funds and Brazil Equity Funds.

The renewed interest in Russia was not enough to stop EMEA Equity Funds from posting outflows for the sixth consecutive week, their longest losing run since 1Q09, as retail redemptions more than offset the first week of institutional commitments since early May. Concerns that GreeceEmerging Europe Equity Fund and Europe, Middle East and Africa Regional fund subgroups.
 
Latin America Equity Funds were also unable to translate the recent thaw in sentiment towards Brazil into fresh money as concerns about US appetite for Mexican exports and the regionMexico Equity Funds drove the action. There was some interest in Colombia, which has passed some key fiscal reforms in recent weeks, with flows into Colombia Equity Funds hitting a 33 week high.

EPFR Global-tracked Developed Markets Equity Funds remained under pressure in mid-June from unresolved debt issues in Europe and the US, mixed economic data and the lack of credible policymaking in key markets. Four of the five major developed market fund groups recorded net outflows during the week ending June 15 and the one group to attract money, US Equity Funds, saw it flow into vehicles that afford investors the ability to exit quickly.
 
Retail investors also contributed to a sixth consecutive week of net redemptions from Japan Equity Funds that dropped YTD inflows, which peaked at USD3.6 billion in late 1Q11, below the USD2.3 billion level. Questions about the country

Outflows from Europe Equity Funds for the week totalled USD741 million as GreeceEurope Regional Funds to their Europe ex-UK Regional counterparts and extended their recent shift from Germany Equity Funds to France Equity Funds.
 
Global Equity Funds posted their first back-to-back weeks of outflows since late December as their exposure to Europe continued to weigh on investor sentiment. Redemptions from the other major diversified developed market fund group, Pacific Equity Funds, climbed to a 12 week high.

Sector funds associated with growth again struggled during the second week of June 15 as investors digested some lackluster US macroeconomic data and fretted over the potential fallout from GreeceCommodity Sector Funds climbed to a four week high, Energy Sector Funds posted outflows for the fifth time in the past seven weeks, Technology Sector Funds had their worst week since mid-March and redemptions from Real Estate Sector Funds hit their highest level since the first week of 3Q10.

Financial Sector Funds were again the exception, absorbing fresh money in the face of growing concern that key plays will be forced to take a haircut on their holdings of Greek, Irish and Portuguese sovereign debt. Apparently, some investors are stepping forward to make contrarian bets in this much maligned sector.

Among the more defensively perceived sector fund groups, Healthcare/Biotech Sector Funds, stood out as another week of solid inflows propelled YTD inflows back over the USD3 billion mark. This fund group, which last recorded a full year inflow in 2004, remains on course for a record setting year.

Expectations that senior holders of Irish and Greek debt will be forced to share the pain sooner rather later prompted investors to aggressively reassess their fixed income exposure in mid-June. While US Bond Funds enjoyed their second best week, YTD redemptions from Europe Bond Funds jumped to a nine week high and High Yield Bond Funds experienced their second biggest weekly outflow on record in USD terms. Global Bond Funds, which have significant exposure to European debt, maintained their inflow streak but took in the smallest amount of fresh money since the second week of April.

Investors did not abandon all fund groups linked to asset classes deemed risky. Emerging Market Bond Funds recorded inflows for the 12th straight week, with flows shifting back towards funds with local currency mandates despite the spread between US Treasuries and JP Morgan

Mortgage Backed and Floating Rate Bond Funds also extended lengthy inflow streaks, with recent flow trends favoring the former, as return starved investors look for alternatives to high yield debt. Until recently those investors had poured money into High Yield Bond Funds, but dropping yields, soaring issuance and a less favourable macroeconomic backdrop have all taken their toll in recent weeks.
 
US Municipal Bond Funds, which snapped a nearly seven month outflow streak the previous week, also struggled with the drop in risk aversion as retail investors pulled a modest USD192 million from these funds for the 31st weekly outflow in the past 32 weeks.

Having a foot in equities as well as bonds did nothing for Balanced Funds. Despite their reputation as a conservative option they posted their biggest outflow since the first week of October.

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