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US Equity Fund flows rebound as Fed deliberates

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Flows into US Equity Funds hit their highest level since late December and Japan Equity Funds attracted record setting inflows during the second week of September as investors of all stripes braced for the US Federal Reserve's latest decision on interest rates. 

Although expectations that the Fed will act at its September meeting have faded in recent weeks, Emerging Markets Equity and Bond Funds extended their current run of outflows, Dividend Equity Funds again suffered net redemptions and over USD620 million – an 11 week high – flowed out of Municipal Bond Funds. On the other hand preliminary numbers based on combined daily and intraday data, which have a more than 85% correlation with the weekly numbers that will appear later today, for the week ending September 19 suggest that High Yield Bond Funds saw their seven week outflow streak come to an end. 

Overall, the numbers show investors committing USD24 billion to all EPFR Global-tracked Equity Funds during the week while pulling some USD3 billion out of Bond Funds and over USD25 billion from Money Market Funds.

At the country level India Equity Funds extended their current outflow streak, Italy Equity Funds continued their strong run of inflows and redemptions from China Equity Funds fell to a five week low.

EPFR Global-tracked Emerging Markets Equity Funds posted their 10th consecutive weekly outflow in mid-September, the longest such run since 1Q14, as the possibility of a hike in US interest rates, uncertainty about the health of the Chinese economy and weak commodities prices maintained the pressure on this asset class.

Asia ex-Japan Equity Funds experienced the biggest redemptions, in both cash and flows as a % of AUM terms, during a week when Chinese equity markets experienced another sell-off. But redemptions from China Equity Funds remained at the relatively low levels since Chinese authorities intervened strongly in early July. Redemptions from India Equity Funds also moderated as mutual fund investors digested data showing headline inflation dropping, thereby increasing the odds of addition interest rate cuts.

Modest flows into Brazil Equity Funds defied the message sent by the recent downgrading of the country's debt to 'junk' territory by Standard and Poor's and doubts about the political will needed to close the country's budget deficit. The inflation rate eased in August, raising hopes that Brazil's central bank may hold interest rates even if it has little scope for cutting them.

Flows into most EMEA Equity Fund groups were subdued as investors waited to see how a range of variables, from US interest rates to the Sunday's Greek election, play out. Africa Regional Funds, however, are in striking distance of their biggest inflow since the first week of January.

The Developed Markets Equity Funds tracked by EPFR Global recorded their biggest inflow of the year going into the Federal Reserve's September meeting as flows to US Equity Funds rebounded and Japan Equity Funds absorbed over USD5 billion.

Flows into Japan Equity Funds were once again largely yen-denominated, and three big domestically domiciled ETFs accounted for over 70% of the headline number. "This may be a case of Japanese policymakers injecting some extra support ahead of the Fed's decision on interest rates," observed EPFR Global Research Director Cameron Brandt.

Europe Equity Funds also chalked up another week of solid inflows that largely bypassed funds with country specific mandates. Italy Equity Funds were an exception, recording their second biggest weekly inflow year-to-date, as investors respond to signs of growth and the agreement of European Union regulators to allow Italy some extra wriggle room in its deficit targets. Retail investors, who returned to Europe Equity Funds in mid-July, look set to commit fresh money for the eighth time in the past nine weeks.

Despite the strong overall inflows recorded by US Equity Funds retail investors did not join the party. Retail investors have pulled money out of this fund group for 10 straight weeks and 34 of the 37 weeks YTD. Overall, flows favored passively managed funds with blended management styles. Among actively managed funds Large Cap Growth Funds attracted the most new money.

Global Equity Funds, the largest of the diversified Developed Markets Equity Fund groups, recorded solid inflows that went largely to funds with ex-US mandates.

Flows for EPFR Global-tracked Sector Funds during the week ending Sept. 16 continued to reflect greater than average concern that this week's Federal Reserve meeting will end in a higher US interest rates. Utilities, Consumer Goods, Technology and Commodities Sector Funds all recorded outflows. But flows into Real Estate Sector Funds rebounded and Financial Sector Funds posted back-to-back weekly inflows for the first time since late July.

Also seeing flows rebound were Energy Sector Funds, which snapped a two week outflow streak ahead of a vote by the US House of Representatives – which is opposed by President Barack Obama – to lift the current ban on oil exports.

Utilities Sector Funds  are under pressure in the US from the spectre of higher interest rates. They are also being hit by fears that a new round of proposed environmental regulations spelled out in the Clean Power Plan released last month will add significantly to the costs of electric utilities.

The week's biggest money magnet, once again, were the Healthcare/Biotechnology Sector Funds which have already taken in over USD30 billion YTD. This fund group has replaced Real Estate Sector Funds as the preferred choice for Japanese investors, with yen-denominated flows into healthcare funds accelerating sharply towards the end of the first quarter.

EPFR Global-tracked Bond Funds flows during the week ending 16 September largely followed the previous week's template, with investors avoiding most fund groups except those dedicated to investment grade government and corporate debt. The pace of outflows from Emerging Markets, Europe and Municipal Bond Funds did accelerate but High Yield Bond Funds found themselves flirting with inflows and redemptions from the main multi-asset fund groups lost momentum. 

Fears that Greece's election, action by the Fed and the amount of new debt coming to market could squeeze liquidity kept the pressure on Europe Bond Funds, which recorded their fourth consecutive weekly outflow. At the country level Italy Bond Funds again stood out.

Among the US Bond Fund sub-groups those with long and short term investment grade mandates fared best while Intermediate Term and Municipal Bond Funds experienced the heaviest redemptions. In addition to concerns about an increase in the relative attractions of federal debt Municipal Bond Funds continue to face headwinds from Puerto Rico's partial default and fears the US state of Illinois could be next. 

Emerging Market Bond Fund redemptions, meanwhile, jumped on the back of Brazil's recent downgrade which raised the specter of further ratings cuts for emerging markets and subsequent selling by funds with ratings criteria in their mandates. Among the markets that could also start slipping out of the investment grade pack are Turkey, Colombia – one of the more popular markets with investors in recent years – and South Africa.

Both of the major multi-asset fund groups, Balanced and Total Return Bond Funds, again posted outflows overall. Total Return Funds, which saw a 69 week inflow streak end in early 2Q15, have now experienced net redemptions 13 of the past 15 weeks.

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