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Money keeps flowing into commodity funds

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Before the reality check delivered by Dubai World, investors were sticking to their recent strategy of building up their exposure to commodities, emerging markets and short term developed market debt with an eye to limiting the impacts of dollar weakness and market volatility.

During the week ending 25 November, commodity sector funds took in over USD1bn for the second week in a row and global bond funds absorbed over USD1bn for the 11th straight week, according to data from EPFR Global.

Year-to-date flows into emerging market equity funds climbed another USD1.8bn to USD58.6bn.

Emerging markets bond funds also fared well, lifting their average weekly inflow during the fourth quarter to USD615m, and US bond funds attracted another USD2.65bn.

Overall, bond funds collectively took in a net USD5.39bn for the week – thereby taking year-to-date inflows over USD157bn – while equity funds surrendered a net USD2.93bn. Some of this new money came from the latest money market fund redemptions, with investors pulling another USD3.6bn out of this fund group, and some from developed markets equity funds.

“These flow numbers clearly don’t reflect the shock delivered by Dubai World’s request for a debt freeze, so it won’t be a surprise if next week’s numbers look a lot different,” says EPFR global senior analyst Cameron Brandt. “But, with a lot of sidelined money looking for an entry point, it also wouldn’t be that surprising if emerging markets and sovereign debt funds attract more money before the year is out.”

After weeks of largely playing second fiddle to the diversified global emerging markets equity funds, Asia ex-Japan equity funds came to the fore during the fourth week of November as investors reassessed their exposure to China in light of its strong 3Q09 GDP figures. They posted net inflows of USD975m for the week, mainly on the back of very strong China equity fund inflows, taking YTD inflows over USD18bn.

Flows into China equity funds hit a YTD high of USD827m despite lingering concerns about the loan books of Chinese banks, whose aggressive expansion of credit has played a major role in sustaining growth in the world’s third largest economy.

Enthusiasm for China  also helped BRIC equity funds extend their current inflow streak to 11 weeks and USD1.8bn. Brazil equity funds, meanwhile, continue to attract fresh money despite the Brazilian government‚s efforts to restrain foreign portfolio capital inflows. These funds took in USD168m for the week as YTD flows move within striking distance of USD5bn.

Flows into EMEA equity funds have now been positive 18 of the past 19 weeks. But, having rebounded strongly in the third quarter as investors looked for exposure to emerging markets assets that had lagged the Chinese-led rally which started in late 1Q09, they have lost momentum in recent weeks despite the commodities stories offered by Russia and South Africa.

Flows into EPFR Global-tracked US, Europe and Japan equity funds were negative during the fourth week of November with currency concerns playing a key role in the outflows as the US dollar continued its decline at the expense of the yen and euro, thereby posing fresh challenges for Japanese and Eurozone exporters. Year to date investors have pulled a total of USD55bn from developed market equity funds, mainly due to large outflows from US equity funds.

In the case of Japan equity funds, investors redeemed USD290m – an eight week high – as the combination of an appreciating yen and domestic deflation put the ability of Japanese companies to increase their prices in a double bind. The fact this challenge is being confronted by a new government drawn largely from the ranks of a party that had never held power until this year is adding to uncertainty about Japan’s immediate prospects.

Pressure on exporters from a strong currency also curbed appetite for exposure to Europe, with Europe equity funds recording outflows for only the fourth time in the past 12 weeks. The USD673m pulled out was the highest weekly total since early June. Rising business confidence, which recently hit a 14-month high, has been offset in investor‚s minds by renewed doubts about the strength of the continent‚s banking sector and by European Central Bank president Jean-Claude Trichet’s call for banks to channel profits to their balance sheets rather than to dividend payments.

US equity funds recorded outflows of USD4.77bn for the week. But a single US large cap blend ETF accounted for the lion’s share of that total and, if, factored out, would have left flows into this fund group modestly positive thanks to flows into small cap and US financial sector funds.

Investors did retain their appetite for diversified exposure to developed markets. Global equity funds absorbed another USD909m, their 19th consecutive week of inflows, while Pacific Equity Funds took in fresh money – albeit very little of it – for the 12th time in the past 13 weeks.

Flows into EPFR Global-tracked commodity sector funds fell just short of the previous week’s record-setting USD1.34bn as investors continued to search for hedges against US dollar weakness and, in some cases, inflation. YTD flows into this fund group now stand at USD14.6bn.

All but one of the other major sector fund groups also took in fresh money for the week. With the Christmas shopping and northern hemisphere heating seasons on the near horizon, consumer goods, technology, energy and utilities sector funds all posted modest inflows ranging from USD118m to USD12m while financial sector funds absorbed USD236m. Healthcare/biotechnology sector funds, under pressure for much of the year because of the ongoing debate over reforming the US system, took in a 26-week high of USD273m as the issue moved from the House of Representatives to the Senate.

Real estate sector funds, the only group to record outflows, saw USD493m redeemed despite the recent extension into 2Q10 of the tax credit that has helped boost US home sales in recent months.

Heading into the final week of November, EPFR Global-tracked fixed income funds continued to take in fresh cash at a brisk clip. US bond funds took in over USD2bn for the 17th straight week as YTD inflows moved north of USD80bn, global bond funds saw YTD inflows climb by another USD1.7bn to USD28.7bn as they ran their currently inflow streak to 33 straight weeks.

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