With negotiations on the so-called US fiscal cliff going down to the wire – and beyond – during the week spanning the final days of 2012 and the beginning of 2013, fund flows took a turn for the cautious as over USD40bn found its way into money market funds.
But investors kept faith with emerging markets, especially Asian ones, and EPFR Global-tracked equity funds extended their longest inflow streak since a 10 week run ended in mid-4Q10.
The sixth straight week of net inflows for all equity funds was driven by institutional investors as their retail investors pulled money out for the 26th consecutive week. Retail redemptions during the week ending 2 January were the highest since mid-May.
Bond funds, meanwhile, attracted a net USD2.29bn. Over half of that flowed into emerging markets bond funds which retained the momentum they built up during the final three months of 2012. But two of the other fixed income groups to set inflow records last year, high yield and mortgage backed bond funds, both struggled to attract fresh money. In the case of the latter a 95 week inflow streak came to an end.
At the country level dedicated China and Italy equity funds again fared well and Japan equity funds had a solid week while France and Russia equity funds saw more cash flow out.
EPFR Global-tracked emerging markets equity funds posted inflows for the 17th straight week in early January, with Asia ex-Japan and the diversified global emerging markets equity funds again to the fore. That is in sharp contrast to the first week of 2012, when this fund group snapped a seven week, USD11.3bn outflow streak driven in part by fears that China’s economy was heading for a "hard" landing.
Fears about China’s economy have largely abated. Consensus forecasts call for GDP growth to hit eight per cent again this year that will be sustained in the first half of the year by public infrastructure spending. China equity funds have now absorbed over USD8bn since the beginning of October and flows into this fund group have broken decisively with those going to its BRIC peers Brazil, Russia and India.
The difficulty selling Russia’s story remains a significant headwind for the EMEA equity fund group, which is also struggling with the political unrest still roiling the Middle East and lingering concerns about the ability of the Eurozone to move beyond simple survival. Redemptions from South Africa equity funds hit a 23 week high despite the country’s benchmark equities index hitting another high in early January.
Flows into Latin America equity funds again favoured Mexico over Brazil. While Mexico’s government is talking about revisiting the issue of foreign investment in state oil monopoly Pemex, Brazil’s recently announced that it tapped the country’s sovereign wealth fund to meet last year’s fiscal targets.
Emerging markets dividend funds posted their 29th consecutive week of inflows and, in contrast to the overall trend for developed markets dividend funds, flows are holding up.
Thin trading volumes around the Christmas and New Year’s holidays and the uncertainty about US fiscal policy subdued flows into EPFR Global-tracked developed markets equity funds going into the New Year. But daily data shows flows into US equity funds soaring on 2 January, the day a deal on the US fiscal cliff was hammered out.
Although over USD3bn flowed into US equity ETFs on that day and over USD5bn during the week, redemptions from actively managed funds reduced the overall net inflow to all US equity funds to under USD1bn. Funds managed for growth outperformed their value counterparts across all capitalisations.
Growth remains an elusive commodity in Western Europe and, despite a 21st consecutive week of flows into US-domiciled funds, Europe funds overall posted outflows for the first time since the third week of November. Investors continue to see a brighter short-term future for Italy than for France, with Italy equity funds taking in fresh money for the eighth week running while France equity funds extended an outflow streak stretching back to mid-September.
In Japan a new administration plans to pursue a back to the future set of policies based on weakening the yen to help exporters and trying to make credit even cheaper. Japan equity funds, which posted their biggest annual inflow last year since 2005, kicked off 2013 by taking in USD474m.
Global equity funds, the major diversified developed markets fund group, recorded their biggest inflow in six weeks.
With the fiscal cliff still looming and the fourth quarter earnings season about to kick off, EPFR Global-tracked sector funds experienced more redemptions than commitments during the week. Two, real estate and consumer goods sector funds, posted net outflows of over USD1bn for the week and only four of the 11 major groups attracted fresh money.
Daily data showed the outflows from real estate sector funds peaked 31 December and were concentrated in actively managed funds, suggesting that tax issues played a role in these redemptions. RTFs accounted for the bulk of the outflows from consumer goods sector funds.
Healthcare/biotechnology, technology, energy, utilities and telecoms sector funds also posted outflows ranging from USD21m to USD370m.
Among those recording inflows were commodities sector funds, with roughly two-thirds of the new money going into gold and precious metals funds despite the recent slide in gold prices. Financial sector funds also extended their current inflow streak to five straight weeks.
After a record setting year that saw over USD470bn flow into EPFR Global-tracked bond funds, 2013 started at a shuffle as investors questioned how much value remains in most fixed income asset classes. The two exceptions, currently, are emerging markets debt and floating rate securities: Emerging markets bond funds attracted over USD1bn and floating rate bond funds extended their current inflow streak to 28 weeks and USD8.1bn.
Elsewhere, most of the major fund groups posted modest inflows ranging from USD11m for Asia-Pacific bond funds to USD358m for US bond funds. At the asset class level municipal bond funds snapped a two week outflow streak while mortgage backed bond funds posted their first outflow since early March 2011.
Flows into emerging markets bond funds continue to shift from those with hard currency mandates towards those with a local currency focus, in part because EM borrowers are trying to rebalance their debt profiles towards domestic markets and many of the more attractive recent issues have been denominated in local currencies.
Europe bond funds posted inflows for the ninth time in the past 10 weeks with investors opting for regional rather than country specific funds. Sweden bond funds did, however, extend their recent winning streak.
Among US bond funds those specialising in intermediate term government debt posted their biggest outflow in 15 weeks while commitments to long term US government bond funds hit a 31 week high.