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US bond and Japan equity funds shine

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Flows into US bond funds hit an 11-week high in the week ending 24 February as investors looked for places to park the more than USD130bn they have pulled out of money market funds so far this year, according to a report by EPFR Global.

On the equity side, emerging market equity funds posted a second straight week of inflows and US equity funds accounted for some 45 per cent of the inflows recorded by all equity fund groups during the week.

Appetite for sector exposure remains weak, with seven of the nine major global sector fund groups recording outflows for the week ranging from USD18m for consumer goods sector funds to over USD700m for financial sector funds.

All of the major bond fund groups attracted fresh money. High yield bond funds snapped their two week losing run and emerging markets bond funds extending their current inflow streak to 16 straight weeks. Among the sub-groups, US inflation protection bond funds posted their biggest weekly inflow in over three years.

Three of the four major EPFR Global-tracked emerging markets equity fund groups posted inflows during the week ending 24 February as investors recovered some of the risk appetite that went missing earlier in the month. Latin America equity funds snapped a four week outflow streak and flows into EMEA equity funds hit an 18-week high. GEM equity funds, however, absorbed the biggest share of the USD915m taken in by all dedicated emerging market equity funds. 

“Questions about the degree to which Chinese authorities will stamp on the brakes to prevent asset bubbles again clouded the outlook of investors in Asia ex-Japan and China equity funds,” says Brad Durham, a managing director of EPFR Global.

The Asia regional funds posted outflows of USD40m while China equity funds surrendered money for the seventh time in the past eight weeks. Investors have now removed USD1.08bn from the China funds year to date.

Although Chinese demand has been a big part of the Latin American story in recent months, investors switched their focus in late February to the five per cent plus growth Brazil expects to post in 2010 and signs of life in Mexico’s economy. Flows into Brazil equity funds hit a five-week high while inflows to Mexico equity funds are at an 18 week high.

In the EMEA equity fund universe, Africa regional funds extended their current winning streak to 25 straight weeks, emerging Europe equity funds had their best week since mid-October and Russia equity funds absorbed USD214m as investors searching for pockets of value focused on these regions and countries.

For the second week running Europe equity funds were the only major developed markets fund group tracked by EPFR Global to post outflows, with US equity funds again faring best in dollar terms and Japan equity funds were again the leader in flows as a percentage of assets under management, amounting to 1.3 per cent of total assets.

Flows into US equity funds, while smaller than the previous week, were broadly based. All of the major sub-groups by style and capitalization recorded inflows ranging from USD10m for mid cap growth funds to USD1.44bn for large cap blend funds.

The renewed, albeit modest, enthusiasm for US assets has helped weaken the yen versus the dollar, increasing the attractiveness of Japanese export plays. Investors committed money to Japan equity funds for the ninth straight week in late February, taking YTD inflows over the USD1.6bn mark. That represents the best start by this fund group since 2006, when they took in a net USD5.4bn during the first five months but ended the year in negative territory.

Europe equity funds chalked up another week of modest outflows, their sixth in a row, as enthusiasm for a more competitive currency and Germany’s latest macroeconomic numbers was offset by concerns about the weak outlook for regional growth and the fallout from Greece’s fiscal crisis.

Global equity funds absorbed a healthy USD1.29bn for the week, and turning year to date flows positive, while Pacific equity funds enjoyed their best week YTD.

Commodity sector funds posted an eighth consecutive week of outflows in late February – their longest losing run in over four years – as doubts about China’s appetite continued to swirl. But financial sector funds regained the lead in YTD terms as fears about the exposure of banks and insurance companies to Greek debt prompted investors to pull out USD724m during the week ending 24 February.

A stronger dollar and concerns about demand also hit energy sector funds, which posted their biggest weekly outflow YTD, while fresh signs of weakness in the US housing market weighed on consumer and real estate sector funds. Elsewhere, telecom sector funds maintained their record of posting outflows every week YTD and technology sector funds suffered their third straight week of net redemptions.

The only two sector fund groups to record inflows had a distinctly defensive flavour, with utilities sector funds snapping a three week outflow streak in the wake of renewed support for the US nuclear sector and healthcare/biotechnology sector funds recording inflows for the third time in four weeks.

Heavy issuance at the sovereign and corporate level, talk of exit strategies by central banks and signs of inflation did nothing to dampen investor appetite for fixed income assets in late February. EPFR Global-tracked bond funds collectively took in USD6.16bn for the week – a 14-week high – as US bond funds took in fresh money for the 60th straight week.

Global bond funds received USD1.9bn of fresh money from investors, extending a winning run that now stretches back over ten months. Year to date investors have pushed about USD13.3bn into these funds. Over the past 12 months investors have contributed a staggering USD51bn to these funds, representing about 22 per cent of the total assets in these funds.

Emerging markets bond funds saw YTD inflows move north of USD3.5bn. With US Fed chairman Ben Bernanke predicting low US interest rates for some time to come, yield hungry investors moved into emerging markets and high yield debt, pushing the spread over US Treasuries for JP Morgan’s benchmark EMBI+ index back below the 300 basis points level.

The share of money going into emerging markets local currency bond funds, which had dropped for three straight weeks, rebounded to 58 per cent of the total committed to all EM bond funds. High yield bond funds reversed a two-week outflow trend and absorbed USD632m of net inflows from investors. Flows into US bond funds were again dominated by funds investing in short term debt, but the USD741m taken in by inflation protection bond funds was the biggest EPFR Global started tracking this sub-group in 1Q06.

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