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Investors chase yield but still shun risk during opening week of the New Year

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In contrast to the beginning of 2011, when they pulled over USD14 billion out of Money Market Funds and channeled nearly USD11 billion into Developed Equity, Emerging Markets Bond and Equity and High Yield Bond Funds, investors remained largely on the defensive in early 2012. Flows into most EPFR Global-tracked fund groups were subdued during the week ending 4 January, with the strongest statements reserved for asset classes promising better than average yields or some degree of safety.

US and High Yield Bond Funds, equity funds with a dividend focus and Municipal Bond Funds recorded the biggest inflows during a week that ended with all Equity Funds posting net outflows of USD1.64 billion while Bond and Money Market Funds took in USD3.45 billion and USD2.07 billion respectively.

There was a slight thaw in sentiment towards funds with a focus on Europe, fund groups associated with riskier or growth-oriented asset classes generally struggled. Emerging Markets Local Currency Bond Funds started 2012 by posting outflows for the seventh time in the past eight weeks, redemptions from Africa Regional Funds hit their highest level since the first week of February and investors pulled over USD500 million out of Commodities and Energy Sector Funds.

In keeping with last year’s pattern, Exchange Traded Funds absorbed some of the money redeemed from actively managed funds. Last year EPFR Global-tracked Equity ETFs took in a net USD69.24 billion while their actively managed counterparts surrendered over USD225 billion.

EPFR Global-tracked Emerging Markets Equity Funds started the New Year by snapping a seven week, USD11.3 billion outflow streak that accounted for over a fifth of the total redemptions for 2011. The diversified Global Emerging Markets (GEM) Equity Funds accounted for all of the week’s inflows as Asia ex-Japan, Latin America and EMEA Equity Funds all posted modest outflows.

In the case of EMEA Equity Funds, which have only posted inflows once since the beginning of 3Q11, the lack of enthusiasm for Africa was compounded by Hungary’s accelerating from grace as investors question the CE3 nation’s ability to meet its borrowing requirements. Hungary’s government has alienated many investors with its de facto nationalisation of private pension funds, selective taxation policies and efforts to curb the central bank’s independence.

Asia ex-Japan Funds, meanwhile, experienced their eighth consecutive week of redemptions, but the pace has ebbed in recent weeks as fund managers and brokerages talk up the value they see in the region’s equity. Fears of a hard landing for China have ebbed, with some managers arguing that the government will favor growth over price stability during a year when a major change in leadership will take place.

The pace of redemptions from Latin America Equity Funds has also slowed, although investors remain leery of Brazil despite its solid growth and recent ascent — at the expense of the UK — to the position of the world’s sixth largest economy by GDP. Inflation remains uncomfortably close to the upper end of the central bank’s target range while the government has demonstrated its willingness to use capital controls and intervene in corporate boardrooms.

Both of the major emerging markets "theme" groups had a lackluster start to the year. Dedicated BRIC (Brazil, Russia, India and China) Equity Funds posted outflows for the 49th time in the 53 weeks since the beginning of 2011 while outflows from Frontier Equity Funds hit an 18 week high.

Retail investors remained conspicuously absent as EPFR Global-tracked Developed Markets Equity Funds kicked off the New Year with generally modest flows either way. US and Global Equity Funds last saw fresh retail money during the second week of July while Europe Equity Funds have not seen any since mid-May.
US Equity Funds, which started the year with outflows of USD1.6 billion after posting a new outflow record in 2011, had some momentum coming into the New Year as investors responded to a steady trickle of better than expected macroeconomic data. But, with the fourth quarter earnings season on the immediate horizon, corporate moves to lower expectations for the quarter and for this year are getting more attention.

Among the headwinds facing US companies is the risk to export sales posed by Europe’s weakening growth. But that weaker growth is weighing on the euro, prompting some investors to pencil in a more competitive currency for regional exporters. Europe Equity Funds posted inflows for the first time in nine weeks, with the new money bypassing country specific funds in favor of regional ones. Germany Equity Funds, which had record setting inflows of USD18.7 billion last year, started this one with outflows of USD139 million.

Currency strength is also an issue for investors looking at Japan. The yen’s recent strength has hit key export plays and, in the continuing absence of the strong reconstruction bounce that was expected in the wake of last year’s tsunami and earthquake, Japan Equity Funds posted outflows for the ninth time in the past 11 weeks.
The two major diversified developed markets fund groups had differing experiences during the first week of 2012. Global Equity Funds started the year with modest outflows. But Pacific Equity Funds posted their biggest inflow since the last week of August.

Global Sector Funds kicked off the New Year with their third straight week of collective outflows as concerns about growth in Europe and bearish earnings guidance from US corporations weighed on investor sentiment. Commodities Sector Funds saw the biggest outflows, with gold and precious metals accounting for around a third of the total, although copper prices hit a three week high in early January.

Investors also opted not to chase the spike in oil prices triggered by the rising tensions between Iran and the US. Redemptions from Energy Sector Funds, which posted a new outflow record in 2011, climbed to a six week high. Another group associated with growth, Technology Sector Funds, recorded their biggest outflow in five weeks. But Financial Sector Funds again swam against a tide of bad news that included UniCredit’s deeply discounted rights issue, taking in fresh money for the fourth time in the past five weeks.

Healthcare/Biotechnology Sector Funds were the week’s biggest money magnets, attracting a 10 week high of USD329 million as retail interest hit its highest level since late May.

Elsewhere, Real Estate, Consumer Goods, Utilities, Infrastructure and Real Estate Sector Funds posted weekly numbers that ranged from a USD17 million inflow to a USD354 million outflow.

Hunger for yield and desire for safety continued their tug of war for the affection of investors in early 2012, with US Bond Funds again accounting for the biggest share of the new money absorbed by all EPFR Global-tracked Bond Funds while High Yield Bond Funds took in over USD1 billion as they extended their current inflow streak to five straight weeks.

At the asset class level those seen as carrying some level of government guarantee continued to fare best. Municipal and Mortgage Backed Bond Funds extended their current winning runs, with the former benefiting from their strong performance in 2011 and the latter from speculation that the US Federal reserve’s next program will specifically target the mortgage market.

Flows into US Bond Funds favored ones tied to those asset classes and high yield debt. But, in terms of flows as a percentage of assets under management, Intermediate and Long Term Corporate Bond Funds stood out.

With the Eurozone’s debt crisis rapidly regaining the spotlight, Europe Bond Funds posted outflows for the 17th consecutive week as Germany Bond Funds experienced their second largest weekly redemption since the start of 2010. UK Bond Funds, however, took in fresh money for the eighth week running.

Emerging Markets Bond Funds eked out modest inflows to start the year as commitments to hard currency funds more than offset a fourth straight week of redemptions from local currency funds. Retail investors committed money to this fund group for the first time in eight weeks.

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