The final days of March saw EPFR Global-tracked emerging markets equity funds make a modest but perceptible start on reversing the more than USD40bn worth of outflows – a quarterly record – they chalked up during the first three months of 2014.
Meanwhile two fund groups that started the year strongly, healthcare/biotechnology sector and Japan equity funds, saw flows falter heading into the second quarter.
While investors showed little appetite for emerging markets equity or debt until the final days of 1Q14, they were less risk averse when it came to developed markets asset classes. Funds dedicated to corporate and junk bonds, the equity of Italy, Spain, Greece and Portugal and European sovereign debt all fared well with year-to-date flows into Europe bond funds already ahead of last year’s record setting total.
Overall, based on combined monthly and daily data through the end of March, EPFR Global-tracked bond funds posted their biggest inflow since 1Q13 while net flows into all equity funds were less than half the USD111bn they pulled in during the final quarter of 2013. Dividend equity funds experienced net quarterly redemptions for the first time since 2Q10.
Institutional investors were the main drivers of overall flows into both bond and equity funds. In the case of the latter, they redeemed over USD20bn between late January and mid-February before turning around and committing over USD40bn during the remainder of the quarter. Retail investors continued to pull money out of equity funds but crept back into bond funds during the final seven weeks of 1Q14.
EPFR Global-tracked emerging markets equity funds endured a rough start to 2014 as the winding down of the Federal Reserve’s quantitative easing programme (QE3), a crowded electoral calendar, mixed economic data from China and events in the Ukraine gave both institutional and retail investors plenty of good reasons to keep their distance. Going into April retail investors had redeemed money from this fund group for 52 weeks in a row.
Not surprisingly, developed markets equity funds have aggressively outperformed their emerging markets counterparts since the start of last year. In early March the gap stood at over 31 per cent, a level that some investors found too big to pass up: the worst performing of the major regional groups, Latin America equity funds, snapped a 22 week outflow streak and took in fresh money nine of the month’s final 10 days.
This search for value also helped EMEA and Russia equity funds shrug off the tensions surrounding Russia’s involvement in the Ukraine’s political crisis. Flows into Russia equity funds between March 21 and 31 equalled nearly three per cent of assets under management (AUM), a gain only topped by the 8.2 per cent that Chile equity funds recorded.
Among the Asian markets China garnered the most attention as speculation that distortions in the country’s credit markets will trigger a hard landing for the world’s second largest economy saw over USD3.5bn flow out of China equity funds during February and March. During the same period flows into India equity funds began to rebound as investors responded to better inflation and current account deficit numbers and hopes of a more business friendly government in the aftermath of May’s general elections.
With investors taking an increasingly country-by-country approach to emerging markets, most of the EM ‘themes’ struggled during 1Q14. Dedicated BRIC (Brazil, Russia, India and China) equity funds extended an outflow streak that stretches back to mid-4Q12 and funds under the MIST (Mexico, Indonesia, South Korea and Turkey) umbrella saw nearly all of last year’s inflows evaporate. Frontier markets were the exception: funds dedicated to countries such as Vietnam, Nigeria and Argentina continued to attract fresh money.
Financial and real estate sector funds, which were buffeted during the second half of last year by the uncertainties surround the Fed’s timetable for ‘tapering’ QE3, took in fresh money eight and nine of the quarter’s 13 weeks.
Utilities sector funds, largely out of favour since early 2012, enjoyed their biggest quarterly inflow since 4Q11 as investors focused on their pricing power, dividend yields and relative lack of volatility.