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Liquidity lifts most fund groups into final week of September

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The week ending 23 September saw the end of money market funds’ eight week, USD151bn outflow streak, but other fund groups continue to benefit from the liquidity created by these massive redemptions, with 22 of the 24 major equity, sector and fixed income fund groups tracked by EPFR Global recording inflows.

Five of the fund groups – global and global emerging markets equity and emerging markets, US and global bond funds – posted year-to-date highs.

Overall, equity fund groups posted collective inflows of USD5.42bn, with emerging markets equity funds having their best week since early June, while fixed income funds (other than money market funds) absorbed USD6.75bn.

“Exchange-traded funds played a big role in this week’s equity fund flows,” says EPFR global senior analyst Cameron Brandt. “Flows into ETFs accounted for 84 per cent of total equity fund flows, and were the reason Japan equity funds had their worst week since late January 2008. That suggests investors are thinking a bit more tactically as they position themselves ahead of the third quarter earnings season.”

Despite fresh doubts about China’s ability to sustain current growth rates, fueled in part by its slowing demand for commodities during 3Q09, EPFR Global-tracked GEM equity funds absorbed a 39-week high of USD2.07bn during the third week of September. YTD flows into this fund group now stand at USD18.2bn compared to outflows of USD12.2bn for the comparable period last year.

The other major emerging markets fund groups, Asia ex-Japan, Latin America and EMEA equity funds, took in USD427m, USD241m and USD208m respectively. In the case of the EMEA equity funds their tenth consecutive week of inflows was underpinned by the ongoing reassessment of the outlook for emerging European markets and by enthusiasm for South Africa and Russia’s commodity stories. Flows into South Africa equity funds hit a YTD high of USD6 m and Russia equity funds took in fresh money for the eighth time in the past ten weeks.

Investors looking for Asian exposure continued to broaden their net in late September, with flows into Korea equity funds hitting a 23-week high and Indonesia equity funds extending their current inflow streak to 12 straight weeks.

Japan equity funds stood out among the EPFR Global-tracked fund groups investing primarily in developed markets during the week ending 23 September, posting outflows of over USD800m.

“That may be a case of investors taking money off the table ahead of the lengthy market holiday in Japan,” says Brandt. “It is certainly at odds with the recent enthusiasm for this market and the inflows seen by the other major developed markets equity funds.”

The biggest money magnets for the week were global equity funds, which pulled in a 102-week high of USD2.04bn and extended their current inflow streak to ten weeks and USD10.6bn. The other major diversified fund group, Pacific equity funds, posted inflows for the tenth time in the past 12 weeks as Australia’s commodity story continues to catch the eye of investors; Australia equity funds took in fresh money for a sixth straight week.

Europe equity funds, meanwhile, moved closer to breaking even in flow terms as they absorbed another USD686m. YTD outflows now stand at only USD730m. Going into the third quarter they stood at USD4.5bn, but a steady stream of better than expected data suggesting the worst is over for the region have helped regional markets and confidence indicators hit 11-12 month highs in recent weeks.

Macroeconomic data from the US has also tended towards the positive, but flows into US equity funds remain subdued as investors remain wary of the outlook for the world’s largest economy when the current stimulus measures begin to wind down. In a shift from the previous week, however, funds managed for growth outperformed their value counterparts – in both flows and performance terms – across all capitalizations.

Several major EPFR Global-tracked sector fund groups lost momentum during the week as headwinds in the form of weaker Chinese demand, bigger than expected US oil stockpiles and profit taking began to build. But commodity sector funds absorbed another USD939m during the week, financial sector funds took in another USD252m and only two sector fund groups posted outflows.

With the public option all but banished from the debate over US healthcare reform, healthcare/biotechnology sector funds managed to post inflows for only the second time in the past eight weeks. Another defensive group, utilities sector funds, also took in fresh money that took YTD outflows – which stood at USD589m going into 3Q09 – down to USD290m.

Real estate and energy sector funds, which took in USD925m and USD377m respectively the previous week, slipped in the face of weaker new home sales numbers and bigger than expected oil inventories, with the former posting outflows of USD26m and the latter taking in a modest USD83m.

Flows into EPFR Global-tracked emerging markets bond funds continued their recent surge, hitting a 189-week high of USD727m during the week, as investor appetite for exposure to fixed income assets moved up another notch. Both global and US bond funds posted their biggest inflows, in dollar terms, since EPFR Global started tracking them in early 2001 while balanced and high yield bond funds extended their current inflow streaks to 25 and 13 straight weeks.

Among US bond funds, short term and inflation protection funds accounted for USD631m and USD385m respectively of the USD3.57bn taken in by this fund group. US municipal bond funds accounted for the biggest share, absorbing USD1.46bn. Global bond funds, which on average allocate a third of their portfolios to US debt, have now taken in fresh money for 24 straight weeks. That run, which has seen USD18.7bn flow into these funds, is their longest since a 27 week streak that ended in early 1Q07.

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