The money kept rolling into Europe and Japan Equity Funds during 3Q15 as mutual fund investors continued to pin what faith they have on markets and asset classes supported by robust quantitative easing (QE) programs.
Preliminary figures based on monthly and daily data show Japan Equity Funds recording their biggest quarterly inflow since EPFR Global started tracking them in 1Q02 while year-to-date flows into Europe Equity Funds now stand at 190 per cent of the full year record set in 2013.?
During a quarter marked by a sharp correction in China's equity markets and persistent fear that the US Federal Reserve would make good on its stated desire to start normalising interest rates investors steered clear of most fixed income fund groups, especially those with multi-asset mandates, while parking over $100 billion in Global and Europe Money Market Funds. It was also a tough quarter for the previously popular Dividend Equity Funds which carried a 10 week outflow streak – their longest since 1Q09 – into October.
For those fund groups that did shine, domestic support was a key factor. Nearly 100 per cent of the record setting inflows recorded by Thailand Bond Funds were baht-denominated, while 80 per cent of the flows into Japan Equity Funds and 74 per cent of the flows into Europe Equity Funds were denominated in domestic currencies.
Retail investors continued to shun Emerging Markets and US Equity Funds and High Yield Bond Funds in favour of Europe and Japan Equity and Investment Grade Bond Funds. Compared to the second quarter they showed less appetite for Balanced and IG Corporate Funds and more interest in Money Market Funds.
The resilience shown by EPFR Global-tracked Emerging Markets Equity Funds between April and June did not survive the third quarter. Facing headwinds ranging from China's slowing economy and tumbling stock market through slumping commodities prices to expectations of the first US interest rate hike in nearly a decade, emerging markets assets and currencies were hit hard. Overall redemptions from Emerging Markets Equity Funds hit levels last seen in 1Q14 when the winding down of the Federal Reserve's quantitative easing program (QE3), uncertainty about China's economic trajectory and Ukraine's unfolding civil war sapped investor confidence.
For the second quarter running Asia ex-Japan Equity Funds experienced the biggest redemptions among the four major EM Equity Fund groups in cash terms while Latin America Equity Funds
were hit hardest in flows as a percentage of AUM terms. In contrast to the previous quarter, when redemptions were driven by outflows from China Equity Funds, it was Asia ex-Japan Funds with regional mandates that took the hit as the third quarter progressed. Outflows from China Equity Funds moderated as Chinese policymakers moved to prop up both economic growth and the stock market, with domestic inflows largely offsetting foreign redemptions.
While flows for China Equity Funds improved, those for India Equity Funds faded as hopes for economic reform fell afoul of Indian legislators. India Equity Funds, which enjoyed record setting inflows during the first quarter, ended September by posting outflows for the seventh time in the past eight weeks and allocations for India among the diversified Global Emerging Markets (GEM) Equity Funds have fallen from the record high posted in January.
GEM Fund allocations for Brazil, meanwhile, are close to dropping below the 7 per cent level for the first time in over a decade. Latin America's largest economy currently offers investors a toxic mixture of stalled growth, political gridlock, soft demand for commodities, above target inflation and sliding credit ratings.
When it comes to their sector allocations, EPFR Global-tracked GEM Equity Funds currently have the greatest exposure to financials, followed by the Information Technology (IT) and Consumer Goods sectors. Cash allocations are averaging around 2.5 per cent, half that of EMEA Equity Funds which have the biggest cash weighting among the four major groups.
With a first hike in US interest rates since 2006 off the table until late October at the earliest, Developed Markets Equity Fund flows reverted to type in late 3Q15 with Europe, Japan and Global ex-US Equity Funds attracting fresh money while US and Global Equity Funds experienced further redemptions.
The redemptions from US Equity Funds were roughly half the previous quarter's outflow and were tilted towards fund groups managed for value rather than growth. Retail flows were negative 12 of the quarter's 13 weeks and retail investors have now pulled money out of this fund group 38 of the 39 weeks YTD.
Europe Equity Funds recorded a string of solid weekly inflows, the bulk of which continues to go to funds with regional rather than country specific mandates, although retail support for this fund group waned as the quarter progressed. Going into 4Q15 there were some exceptions to the general preference for diversified exposure. Italy Equity Funds posted inflows for the 10th straight week in late September and Netherlands Equity Funds ended the month by posting their biggest inflow since the final week of 1Q11 as some investors looked for alternatives to a German economy wrestling with the implications of the Volkswagen emissions scandal.
Flows into Japan Equity Funds shifted again, with yen-denominated institutional commitments accounting for the bulk of the quarter's inflows as foreign investors wait for business investment and consumer spending to pick up and Prime Minister Shinzo Abe's administration to deliver on promises of structural reform.
Global Equity Funds, the largest of the diversified Developed Markets Equity Fund groups, are on track to eclipse the full year inflow record they set in 2013 after a solid quarter in which commitments to Global ex-US Equity Funds offset net redemptions from their fully global counterparts.
Having spent much of the third quarter bracing for higher US interest rates, sector investors breathed a cautious sigh of relief in late September and started looking ahead to the next corporate earnings season. Going into October the Volkswagen scandal, a raft of new environmental proposals on both sides of the Atlantic and US presidential candidate Hillary Clinton's pledge to rein in medical drug costs had also reminded investors of the impact that regulators can have on individual sectors.
Although Healthcare/Biotechnology Sector Funds remain the runaway leaders YTD in both flows and performance terms, Clinton's pledge allied to rich biotechnology valuations saw this fund group end the third quarter with their first back-to-back weekly outflows since late April.
The expectation of higher US interest rates kept Technology Sector Funds under pressure for much of July, August and September and their net quarterly outflow was the biggest on record in cash terms and the biggest since 4Q12 in per cent of AUM terms. With the next Fed meeting less than four weeks away the rebound in flows during the third week of September was short lived.
During the quarter mutual fund investors favoured Healthcare/Biotechnology, Energy and Financial Sector Funds while redeeming around USD3 billion apiece from Commodities, Technology and Infrastructure Funds . Fund managers, meanwhile, steered significant sums into materials stocks, cut their exposure to the financial and energy sectors and followed the same script as investors when it came information technology and healthcare plays.
It was "risk off" for fixed income investors during the third quarter as uncertainty about US interest rates, the state of the recovery in Japan and Europe and the sharp declines in the value of many currencies prompted them to circle the wagons. Going into October only Investment Grade Sovereign and Mortgage Backed Bond Funds had managed to attract fresh money during a quarter when EPFR Global-tracked Bonds Funds overall posted their largest collective outflow since 4Q13.
Among the groups seeing significant redemptions were Balanced, Investment Grade Corporate, merging Markets, High Yield and Total Return Bond Funds which posted their biggest quarterly outflows since 4Q11, 4Q13, 1Q14, 3Q14 and 4Q14 respectively.
Both of the major multi-asset fund groups, Balanced and Total Return Bond Funds, struggled as investors wondered if fund managers can liquidate their holdings quickly in the event of a spike in redemptions. Balanced Funds ended the quarter having extended their longest outflow streak since 4Q11 while Total Return Funds, which saw a 69 week inflow streak end in early April, have now experienced net redemptions 14 of the past 16 weeks.
Europe Bond Funds also ended the quarter on a losing note, posting outflows for the fifth time in the quarter's final six weeks despite the expectation that some sluggish macroeconomic data from the Eurozone will prompt the European Central Bank to expand its QE program in the coming months. Although most Europe Country Fund groups have struggled Italy Bond Funds fared well in September, posting their biggest weekly inflow in over four years along the way.
Amidst a tough quarter for Emerging Markets Bond Funds those with intermediate term (4-6 years) and broad Emerging Asian mandates fared best. At the country level Thailand Bond Funds stood out as local money from previously guaranteed deposit accounts poured in.
Among the US Bond Fund groups one enjoying the last vestiges of Fed support kept attracting money: with the Fed still rolling over gains from previously acquired mortgage backed securities back into this asset class Mortgage Backed Bond Funds posted inflows 10 of the quarter's 13 weeks. Elsewhere, investors titled from funds with intermediate term mandates to those dedicated to short and long term debt investment grade debt and pulled back from Municipal Bond Funds as Puerto Rico's finances continued to deteriorate.
