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Japan equity and energy funds attract otherwise subdued flows

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Flows into US bond funds, global bond funds, Japan equity funds and several sector fund groups stood out during an otherwise lacklustre week ending 15 July, as investors hunkered down f

Flows into US bond funds, global bond funds, Japan equity funds and several sector fund groups stood out during an otherwise lacklustre week ending 15 July, as investors hunkered down for the second quarter earnings season, according to a report from EPFR Global.

In this uncertain investment climate, fixed income funds continued to shine with global and emerging markets bond funds both extending their inflow streaks to 14 straight weeks and balanced funds taking in fresh money for a 15th consecutive week.

Flows into global bond funds hit their highest level in percentage terms since the final week of 2002 and US bond funds absorbed over USD1bn for the 17th time in the past 19 weeks.

Inflation concerns continued to show up in the flows data as the strongest inflows among the US bonds were recorded by short term bond funds, inflation protected bond funds, and short term government bond funds. US municipal bond funds again led the US bond fund pack for inflows in total USD terms.

Overall, all equity funds tracked by EPFR Global recorded net outflows of USD1.27bn for the week while all fixed income fund groups took in a net USD3.35bn. Seven of the ten major equity fund groups, two of the six main fixed income groups and one of the nine major sector fund groups posted net flows that were less than 0.2 per cent of assets under management.

Asia ex-Japan equity funds were the only one of the four major emerging markets fund groups to post inflows during the second week of July as appetite for exposure to riskier asset classes continued to cool.

Latin America equity funds recorded their fourth straight week of outflows, investors pulled USD170m out of EMEA equity funds and the diversified global emerging markets equity funds surrendered a modest USD16m.

Although China’s 2Q09 GDP numbers were not expected to disappoint, investors sought more diversified exposure ahead of Thursday’s announcement of 7.9 per cent growth. China equity funds recorded outflows of USD101m for the week while Greater China equity funds took in a net USD201m. BRICs equity funds also, just barely, extended their inflow streak to 17 straight weeks.

Latin America equity funds and EMEA equity funds, meanwhile, suffered as investors questioned Brazil and Russia’s commodity stories and looked to India’s defensive qualities and higher growth rates. Brazil equity funds and Russia equity funds surrendered USD229m and USD112m respectively while India equity funds absorbed USD77m.

During the week ending 15 July, EPFR Global-tracked Japan equity funds recorded inflows for the third straight week even though the investment case for the country contains as many minuses – an appreciating yen, the threat of deflation, political turmoil – as pluses. Their current winning streak is the longest since a ten-week run that ended in early 3Q08.

The other major fund group tied to a single developed market, US equity funds, posted their fifth straight week of modest outflows, taking the year-to-date total within striking distance of USD53bn. Investors pulled money out of general equity funds across all capitalizations, but did show some appetite for sector-specific exposure. For the second week running US large cap growth funds outperformed their US large cap value counterparts.

With industrial production still sliding and German confidence indicators stumbling, investors also pulled money out of Europe equity funds. It was the seventh straight week of outflows for this fund group, which has suffered from investor skepticism regarding regional policymakers ability to coordinate an effective response to the global recession and the financial sector issues that triggered it.

The biggest of the two major diversified fund groups that invest primarily in developed markets, global equity funds, posted outflows of USD272m while Pacific equity funds – which average a 38 per cent allocation for Japanese equities – took in a net USD2m.

EPFR Global-tracked energy sector funds rebounded strongly as the week ending 15 July drew to a close, taking in fresh money for three straight days on their way to a weekly tally of USD603m.

Exchange-traded funds accounted for the bulk of the inflows, which represented a 42-week high for this fund group.

But flows into commodity sector funds, which are driven by some of the same factors (dollar weakness, anticipation of growth, tight supplies), were negative for the third straight week. That is the worst run of this fund group, the runaway winner YTD with net inflows of USD6.18bn, since early 4Q08.

Funds investing in defensive sectors had one of their better weeks, with consumer goods, healthcare/biotechnology, telecoms and utilities sector funds taking in USD374m, USD176m, USD11m and USD10m respectively.

Flows into financial sector funds got a big boost with the announcement of Goldman Sach’s bumper earnings, snapping a nine-day outflow streak and attracting USD499m on 14 July that nearly offset early outflows. The USD52m in outflows they recorded was overshadowed by the USD324m pulled out of real estate sector funds. A growing chorus of strategists expects conditions in the commercial property sector to get worse before they get better.

The four major bond fund groups had another solid week as investors look to them to provide higher returns than money market funds without the volatility associated with equities. US bond funds maintained their record of taking in fresh money every week YTD as total inflows pushed over the USD33bn mark, high yield bond funds took in fresh money for the 17th time in 18 weeks, global bond funds absorbed over USD1bn for the third time in the past seven months and emerging markets bond funds extended their longest inflow streak since a 22-week run that ended in mid-1Q07.

Money market funds continue to surrender the money they piled up during 2007-08, with investors pulling another USD11.6bn out of this fund group. That took YTD outflows over the USD185bn mark. Nevertheless, going back to the beginning of the credit crisis in mid-2007 these funds, which serve as the equivalent of cash, are still holding more than USD544bn of net inflows.

Inflationary concerns were still evident in this week’s flow data. The two US bond fund groups with the strongest inflows as a percentage of their total assets, were again the short term bond funds, which contain a mixture of government and corporate bonds, the inflation protected bond funds, and the short term government bond funds. US municipal bond funds, which took in more than USD700m of net inflows, continued on their strong net inflow streak dating back to the last week of December 2008, during which time they have taken in more than USD11bn of investor contributions.

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