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Investors remain unwilling to bridge gap between EM and developed markets funds

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Since the beginning of 2013 the average EPFR Global-tracked developed markets equity fund has gained over 27 per cent while the average emerging markets equity fund has lost over five per cent.

Going into March, however, flows suggest that even with this performance gap investors still regard emerging markets as fairly rather than undervalued.
 
During a week when US macroeconomic data was mixed at best and the Eurozone was talking up projections of one per cent growth for this year investors pumped USD15.9bn into developed markets equity and bond funds while pulling USD4.8bn out of emerging markets equity and bond funds. Year-to-date they have committed just shy of USD90bn to the former while pulling USD41bn from the latter.
 
Overall, equity funds absorbed a net USD8.2bn in the seven days ending February 26 while bond funds pulled in USD2.9bn. Money market funds posted inflows of USD14.7bn despite redemptions from Europe MM funds hitting a nine week high.
 
At the country level flows into Japan equity funds stalled and investors resumed their exodus from Switzerland equity and bond funds. But investor interest in Sweden picked up, with Sweden equity funds recording their biggest weekly inflow in exactly a year while Sweden bond funds took in fresh money for the fifth straight week. Among fund groups dedicated to emerging markets those focusing on frontier markets were among the few to attract any new money.
 
After two consecutive weeks of declines, redemptions from EPFR Global-tracked emerging markets equity funds accelerated during the fourth week of February against a backdrop that included the political crisis in the Ukraine and China’s renminbi joined the ranks of depreciating emerging market currencies. The sudden slide in China’s currency prompted foreign investors to pull back, with foreign-denominated redemptions from China Equity Funds hitting their second highest weekly total YTD and offsetting the first week of local currency commitments since late January. Greater China equity funds also experienced outflows, the largest since the first week of May, as did dedicated Taiwan and Hong Kong equity funds.
 
Japan equity funds saw commitments drop off sharply during the fourth week of February, from over USD1bn the week ending February 19 to USD5m, as yen-denominated flows turned negative for the first time since mid-December. On the horizon is a three per cent increase in the national sales tax, taking it from five per cent to eight per cent, that is due to go into effect April 1. The last time Japan hiked this tax in 1997 it was credited with derailing the strongest recovery since Japan’s asset bubble popped in 1992.
 
 
For US bond funds the biggest contributors to the week’s overall inflows were high yield, floating rate and total return bond funds while fund groups dedicated to government debt struggled to attract fresh money. The appetite for junk bonds has also helped the recovery in US municipal bond fund flows, with high yield municipal bond funds attracting fresh money every week YTD, and is also evident on the other side of the Atlantic where Europe high yield bond funds’ current inflow streak stretches back to early July.
 
At the geographic level investors focused on Europe continue to favour regional over country specific funds although flows into Spain bond funds did pick up, hitting a six week high, and Sweden bond funds extended their solid run.

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