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Return of flows to equity funds may be temporary, says EPFR

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Confidence appeared to be returning to investors in the latest weekly fund flows data released by EPFR Global, as investors made net contributions to both equity and bond funds for the first time in four weeks while making large withdrawals from ultra-cautious money market funds.

 

But the accumulating animal spirits were getting extinguished towards the end of the week ending June 1 by the disappointing macro-economic data in the US, in particular employment data indicating that the jobs recovery has virtually stalled. Whether the recent worse-than-expected GDP, housing and jobs data in the US represents a temporary pause in the recovery due to exogenous events such as weather, higher energy prices and the earthquake/tsunami in Japan or a more ominous sign of a stalling economic recovery and resulting deterioration of corporate earnings will firmly be on the minds of investors in the coming week.  

The combined Equity Funds tracked by EPFR Global saw inflows of USD1.7 billion, which arrests a three week investor exodus totaling USD18 billion. Meanwhile, the combined Bond Funds tracked absorbed USD3.5 billion in net inflows, for their 16th consecutive weekly inflow even as bond yields contracted further and the yield on the benchmark 10-year US Treasury dipped to a year to date low under 3%. Year to date inflows into bond funds of USD49.7 billion now exceeds the USD45.3 billion that has flowed into equity funds.

The weekDeveloped Market Equity Funds extended their year to date inflow total to USD51.2 billion while the Emerging Market Equity Funds, with their first weekly inflow in three weeks, reduced their YTD outflow total to USD7.7 billion.

As the disappointing economic data has shifted investor concerns from the future risk of inflation to the current potential of recession, flows into fund groups that are insulated from the effects of inflation slowed or reversed. Indeed, the Inflation Protected Bond Funds suffered their first weekly outflow since December, 2010. Meanwhile, Floating Rate Bond Funds, which tend to perform better than other fixed income asset classes in an inflationary environment, had their slowest inflow since March and the second slowest inflow since last December. Investors generally favoured investment grade bond funds during the week, with a strong commitment to both short and long term government and corporate funds, while flows into High Yield Bond funds were the slowest in the current 10 week stretch of weekly inflows.
 
While a shift towards greater aversion to risk was evident, investors are not running to the comfort of Money Market Funds. They made net withdrawals of USD24.2 billion from these funds, which invest in ultra-safe and short-term credit instruments and commercial paper. This was the largest weekly outflow since April and the third biggest outflow this year. Year to date, investors have pulled USD60.3 billion out of the money market funds.
   
The combined Emerging Market Equity Funds tracked by EPFR Global had net inflows of USD835.8 million during the week, their first weekly inflow since May 11. Investor interest was centered on the geographically diversified GEM Equity Funds and the best weekly inflow into emerging Asian related funds since April.
 
Flows into emerging Asia were driven by sudden investor interest in Greater China Funds, which may invest in mainland China, Taiwan and Hong Kong, that made a USD244 million contribution to the weekly inflows into dedicated EM equity funds. Separately, Taiwan Equity Funds and Hong Kong Equity Funds also enjoyed solid inflows and improving investor sentiment. Meanwhile, investors pulled money from the Asia ex-Japan Regional Equity Funds, India Equity Funds, and Korea Equity Funds.

Investor flows into Latin America Equity Funds were also in positive territory for the week ending June 1, led entirely by strong investor demand for Brazil Equity Funds, which took in USD132 million and that was their strongest weekly inflow since the week of January 12.
 
The laggard emerging market region this week was EMEA, in particular emerging Europe, as investors withdrew a net USD120 million from Emerging Europe Equity Funds for their fourth consecutive weekly outflow. And investor redemptions from Russia Equity Funds were also in dutiful lockstep with the regional funds in posting their fourth straight weekly outflow. Oil prices falling back below the psychologically important USD100 level and general investor aversion to risk amid weakening global macro-economic data hampered sentiment for Russia and the region.

The geographically diversified Global Equity Funds led investor inflows into the developed market equity funds in the latest week, accounting for USD863 million of the total.
 
US Equity Funds enjoyed their first weekly inflow in four weeks, led by the US Small Cap Equity Funds that took in USD371 million of net inflows. Small cap equity fund returns were also positive across all style groups for the week. Meanwhile US Midcap Equity Fund flows were even on the week while the US Large Cap Equity Funds saw outflows of about USD1.5 billion. On a year to date basis, US Equity Funds have attracted net inflows of USD25.8 billion.
 
Europe Equity Funds posted their first weekly inflow, albeit modest, in three weeks and extended their year to date inflow total to USD6.1 billion, keeping this broad fund group in play to post its first annual inflow since 2006, when Europe funds received inflows of USD9 billion.

Investors pulled money from Japan Equity Funds for the fourth consecutive week even as the latest macro data from Japan suggests the post-crisis rebuilding effort is beginning to stimulate economic growth.  
 
Among global sector funds, investors showed a clear preference for Consumer Goods Funds in the latest week. Inflows into these funds on a percentage of total assets basis amounted to 1.5% and were by far the strongest among dedicated sector funds.

Also seeing strong investor interest were the Health Care/Biotech Funds, which benefitted from their classic defensive reputation to post the strongest weekly inflow in total USD terms.

Energy Sector Funds and Financial Sector Funds were the clear laggards during the week, with funds investing in financials suffering a -1% return on the week and flat flows while energy funds suffered USD225 million of net outflows while posting a respectable 0.4% return for investors during the week.  

Flows into Commodity Funds were tepid, taking in just USD130 million during the week. Driving the inflow action were a couple of leading materials sector ETFs and broad based commodity index funds.  

Emerging Market Bond Funds had inflows of USD432 million, with most of the investor interest going into dedicated local currency bond funds and, indeed, for good reasons. The EM local currency funds returned a whopping 1.4% during the week as emerging market currencies strengthened against the USD as expectations of continuing low interest rates in the US combined with a peak in rate hikes in emerging markets to combat inflation increase the hope among investors of improving emerging market local currency bond returns.
 
The recent trend of inflows into the investment grade bond fund groups and declining inflows into High Yield Bond Funds continued in the latest week. Inflows into the core investment grade fund groups (Short, Intermediate, Long Term Bond Funds holding both corporate and government securities), were all stronger on a percentage of assets basis, despite declining yields in the investment grade universe, while investors committed the least amount to the High Yield Bond Funds since the week of March 23. YTD inflows now stand at USD16.2 billion.
 
And High Yield was the worst performing fund group among all fixed income funds, eking out a 0.12% return. By contrast, Long-Term Government Bond Funds gained a staggering 1.9% during the week.

Another week of outflows was recorded by the Municipal Bond Funds, their 29th consecutive weekly outflow. But the USD309 million redemption, while stronger than the recent four-week range of USD100-200m weekly outflows, was still considerably less than the USD600-900m range prior to May. With  states and municipalities in the US struggling with fiscal deficits, it is unlikely that municipal bonds will be stripped of their tax exempt status even though this proposal is contained in budget deficit reduction proposals currently being debated in the US capitol. It is also encouraging for the asset class that the poor employment data recently unveiled was partly due to the elimination of government jobs as states and municipalities attempt to get their fiscal houses in order.       
 
Mortgage-Backed Bond Funds continued their inflow streak in the latest week, pulling in USD314 million for their 12th straight weekly inflow. Year to date inflows for this fund group now stand at USD3.2 billion, well on pace to exceed last year

Balanced Funds, which invest in a combination of equities and bonds, recorded mild outflows for the week while returning a solid 0.5%.

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