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Riskier asset classes fare well as investors search for pockets of value

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The third week of February saw the Dow Jones Industrial Average flirt with the 13,000 point level, Greece move closer to securing the bailout needed to avoid a hard default next month and China cut bank reserve requirements for the second time since November. Investors responded by pulling nearly USD6 billion out of US Equity Funds, snapping China Equity Funds’ six week inflow streak and focusing on European markets outside the embattled Eurozone.

While quick to take profits from good news, however, they were not shy about steering money into riskier asset classes. Mortgage Backed Bond Funds enjoyed record setting inflows, High Yield Bond Funds took in another USD1.3 billion, flows into Alternative Funds hit their highest level in over four years and Frontier Markets Equity Funds had their best week since early July.

Overall, EPFR Global-tracked Equity Funds posted collective outflows during the week ending 22 February of USD5.9 billion as flows into Emerging Markets Equity Funds dwindled to an eight week low, while Bond Funds pulled in over USD5 billion for the fifth consecutive week. Money Market Funds attracted a net USD4.82 billion that pulled year-to-date outflows back under the USD60 billion mark.

Flows into EPFR Global-tracked Emerging Markets Equity Funds lost momentum for the second straight week as investors took profits and digested the implications of higher oil prices on the US recovery and Europe’s chances of avoiding another recession. The diversified Global Emerging Markets (GEM) Equity Funds posted their first weekly outflow since mid-December — and their first daily outflow of 2012 — although YTD inflows still stand at USD18.5 billion versus outflows of over USD13 billion during the comparable period last year. The three major regional fund groups posted modest inflows ranging from USD29 million to USD371 million.
Asia ex-Japan Equity Funds managed to attract fresh money for the seventh week running despite a drop in appetite for exposure to China and another week of bigger than average redemptions from Taiwan Equity Funds. Investors continue to warm to India and Indonesia, with India Equity Funds extending their longest inflow streak since 4Q10 and Indonesia Equity Funds taking in fresh money for the eighth week running.

Flows into EMEA Equity Funds were again driven by Russia’s oil story as tensions in the Middle East pushed prices close to a nine month high. But higher energy prices — if sustained — spell trouble for other EMEA markets such as Hungary, the Baltic Republics, Turkey the Ukraine and South Africa.
Latin America Equity Funds eked out inflows for the sixth week in a row, their best run since 4Q10, in spite of fresh redemptions from funds dedicated to Brazil and Colombia. Brazil Equity Funds have paid for a poor earnings season and fears that inflation may be regaining traction, while inflationary concerns and guerilla attacks on energy infrastructure were factors in Colombia Equity Funds worst week in over three years. 

Investors found fresh reasons to book gains on developed markets equity during the third week of February as higher oil prices and slowing European growth trumped more decent US macroeconomic data and progress towards a bailout deal for Greece.

US Equity Funds with a Value focus outperformed their Growth counterparts across all capitalizations for only the second time this year as outflows climbed to a 13 week high of USD5.84 billion. Mid Cap Equity Funds did attract fresh money for the sixth time in the past seven weeks, with both actively managed and index funds posting inflows, while Large Cap ETFs accounted for the bulk of the outflows.

Flows into Europe Equity Funds did turn positive as the week and the Greek bailout deal progressed. But the bulk of the money that investors committed went to fund groups dedicated to the biggest non-Eurozone markets, with Switzerland Equity Funds recording their biggest weekly inflow since early September and UK Equity Funds absorbing fresh money for the sixth time in the eight weeks YTD. Retail investors were net redeemers for the 40th consecutive week.

Japan Equity Funds extended their current outflow streak to 11 straight weeks, their longest since a 12 week run ended in mid-September, 2010. Although daily flow data showed some improvement in response to the depreciation of the yen versus the dollar, a trend welcomed by Japanese exporters, the country’s dependence on imported energy and its murky economic policy-making remain a deterrent to investors.

The larger of the two major diversified developed markets fund groups, Global Equity Funds, posted their biggest outflow since the third week of December. But Pacific Equity Funds posted inflows for the seventh time in the eight weeks YTD.

EPFR Global-tracked Real Estate Sector Funds sustained their bright start to 2012 by taking in fresh money for the seventh straight week. The latest inflows, which came in spite of signals from the US Federal reserve that a third round of quantitative easing aimed at housing is not likely, took YTD inflows past the USD3 billion mark.

Commodities Sector Funds were the other major sector fund group to shine, taking in USD751 million for the week with funds dedicated to gold and precious metals accounting for a little over a quarter of that total. Retail investors committed fresh money for the first time in six weeks as China forecast 8% plus GDP growth for the year and the US economy continued its recovery. Higher oil prices and hopes for US and Chinese growth did not translate into significantly higher flows for Energy Sector Funds: they attracted only USD6 million during the week.

One of last year’s winners, Utilities Sector Funds, had their worst week on record in dollar terms and since 4Q02 in flows as a percentage of assets under management terms. "While one fund group accounted for over half the week’s outflows, they are in keeping with the marked drop in appetite for more defensive sectors that we’ve seen so far this year," observed EPFR Global Research Director Cameron Brandt.
Financial, Consumer Goods, Telecoms, Infrastructure and Healthcare/Biotechnology Sector Funds also posted outflows ranging from USD75 million to USD341 million.

The week ending Feb. 22 saw EPFR Global-tracked Bond Funds take in another USD5.33 billion, taking YTD inflows up to USD50.9 billion. Riskier, more rewarding fund groups again claimed the biggest share of the latest inflows with Mortgaged Backed Bond Funds having their best week on record, High Yield Bond Funds taking in over USD1 billion for the eighth consecutive week and Emerging Markets Bond Funds absorbing another USD701 million.

At the asset class level Mortgage Backed Bond Funds stood out, taking in USD931 million, as investors continue to see value in what has for much of the current financial crisis been viewed as a distressed area of the market. Total Return Funds took in fresh money for the eighth straight week but Floating Rate Funds posted their biggest weekly outflow since November and investors pulled money from Inflation Protected Bond Funds for the second week running.

Emerging Markets Bond Funds with hard currency mandates again out-gained their local currency counterparts, although the margin slipped again to less than 2:1. Emerging Asia Bond Funds remain the preferred regional fund group, having absorbed three times the new money YTD as EMEA and Latin America Bond Funds combined.

Uncertainty about the details of Greece’s latest bailout was reflected in the first back-to-back weeks of outflows YTD for Europe Bond Funds which, nevertheless, remain USD1.6 billion to the good YTD. At the country level UK Bond Funds posted their biggest outflow since mid-June while Germany Bond Funds just managed to snap a three week outflow streak.

Among the alternative fund groups those specialising in convertible bonds are seeing increased interest. During the past two weeks Convertible Bond Funds have posted two of their five biggest weekly inflows.
 

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