Money keeps flowing into Global Bond, EM Equity and Commodity funds

KUALA LUMPUR: Before the reality check delivered by Dubai World ahead of the Thanksgiving holiday, investors were sticking to their recent strategy of building up their exposure to commodities, emerging markets and short term developed market debt with an eye to limiting the impacts of dollar weakness and market volatility.

According to EPFR Global, which issued the statement late Tuesday, Dec 1, it said during the week ending Nov 25, Commodity Sector Funds took in over US$1 billion for the second week in a row, Global Bond Funds absorbed over $1 billion for 11th straight week.

Year-to-date flows into Emerging Market Equity Funds climbed another US$1.8 billion to US$58.6 billion (including funds reporting only monthly through end of October the total inflows are US$72.5 billion, compared to the previous record of US$54 billion for all of 2007).

Emerging Markets Bond Funds also fared well, lifting their average weekly inflow during the fourth quarter to US$615 million, and US Bond Funds attracted another US$2.65 billion.

Overall, bond funds collectively took in a net US$5.39 billion for the week – thereby taking year-to-date inflows over US$157 billion -- while equity funds surrendered a net $2.93 billion.

Some of this new money came from the latest Money Market Fund redemptions, with investors pulling another US$3.6 billion out of this fund group, and some from developed markets equity funds.

“These flow numbers clearly don’t reflect the shock delivered by Dubai World’s request for a debt freeze, so it won’t be a surprise if next week’s numbers look a lot different” noted EPFR Global Senior Analyst Cameron Brandt.

“But, with a lot of sidelined money looking for an entry point, it also wouldn’t be that surprising if emerging markets and sovereign debt funds attract more money before the year is out.”

Emerging Market Equity Fund Flows

After weeks of largely playing second fiddle to the diversified Global Emerging Markets (GEM) Equity Funds, Asia ex-Japan Equity Funds came to the fore during the fourth week of November as investors reassessed their exposure to China in light of its strong 3Q09 GDP figures.

They posted net inflows of US$975 million for the week, mainly on the back of very strong China equity fund inflows, taking YTD inflows over US$18 billion.

Flows into China Equity Funds hit a YTD high of US$827 million despite lingering concerns about the loan books of Chinese banks, whose aggressive expansion of credit has played a major role in sustaining growth in the world’s third largest economy. Enthusiasm for China also helped BRIC (Brazil , Russia , India and China ) Equity Funds extend their current inflow streak to 11 weeks and US$1.8 billion.

Brazil Equity Funds, meanwhile, continue to attract fresh money despite the Brazilian government’s efforts to restrain foreign portfolio capital inflows. These funds took in $168 million for the week as YTD flows move within striking distance of US$5 billion.

Flows into EMEA Equity Funds have now been positive 18 of the past 19 weeks. But, having rebounded strongly in the third quarter as investors looked for exposure to emerging markets assets that had lagged the Chinese-led rally which started in late 1Q09, they have lost momentum in recent weeks despite the commodities stories offered by Russia and South Africa .


Developed Market Equity Fund Flows

Flows into EPFR Global-tracked US, Europe and Japan Equity Funds were negative during the fourth week of November with currency concerns playing a key role in the outflows as the US dollar continued its decline at the expense of the yen and euro, thereby posing fresh challenges for Japanese and Eurozone exporters.

Year to date investors have pulled a total of US$55 billion from developed market equity funds, mainly due to large outflows from US equity funds.

In the case of Japan Equity Funds, investors redeemed US$290 million – an eight week high – as the combination of an appreciating yen and domestic deflation put the ability of Japanese companies to increase their prices in a double bind.

The fact this challenge is being confronted by a new government drawn largely from the ranks of a party that had never held power until this year is adding to uncertainty about Japan ’s immediate prospects.

Pressure on exporters from a strong currency also curbed appetite for exposure to Europe , with Europe Equity Funds recording outflows for only the fourth time in the past 12 weeks.

The US$673 million pulled out was the highest weekly total since early June. Rising business confidence, which recently hit a 14-month high, has been offset in investor’s minds by renewed doubts about the strength of the continent’s banking sector and by European Central Bank President Jean-Claude Trichet’s call for banks to channel profits to their balance sheets rather than to dividend payments.

US Equity Funds recorded outflows of US$4.77 billion for the week. But a single US Large Cap Blend ETF accounted for the lion’s share of that total and, if, factored out, would have left flows into this fund group modestly positive thanks to flows into Small Cap and US Financial Sector Funds.

Investors did retain their appetite for diversified exposure to developed markets. Global Equity Funds absorbed another US$909 million, their 19th consecutive week of inflows, while Pacific Equity Funds took in fresh money – albeit very little of it – for the 12th time in the past 13 weeks.

Sector Funds

Flows into EPFR Global-tracked Commodity Sector Funds during the week ending Nov. 25 fell just short of the previous week’s record-setting US$1.34 billion as investors continued to search for hedges against US dollar weakness and, in some cases, inflation. YTD flows into this fund group now stand at US$14.6 billion.

All but one of the other major sector fund groups also took in fresh money for the week. With the Christmas shopping and northern hemisphere heating seasons on the near horizon, Consumer Goods, TECHNOLOGY [], Energy and Utilities Sector Funds all posted modest inflows ranging from US$118 million to $12 million while Financial Sector Funds absorbed US$236 million.

Healthcare/Biotechnology Sector Funds, under pressure for much of the year because of the ongoing debate over reforming the US system, took in a 26-week high of US$273 million as the issue moved from the House of Representatives to the Senate.

Real Estate Sector Funds, the only group to record outflows, saw US$493 million redeemed despite the recent extension into 2Q10 of the tax credit that has helped boost US home sales in recent months.

Bond and other Fixed Income Funds

Heading into the final week of November EPFR Global-tracked fixed income funds continued to take in fresh cash at a brisk clip. US Bond Funds took in over US$2 billion for the 17th straight week as YTD inflows moved north of 80 billion, Global Bond Funds saw YTD inflows climb by another US$1.7 billion to US$28.7 billion as they ran their currently inflow streak to 33 straight weeks at the US$832 million taken in by Emerging Markets Bond Funds was the third highest weekly total so far this

Short Term and Inflation Protection Funds were again responsible for nearly half of the flows into US Bond Funds, with Municipal and Intermediate Term Funds also seeing solid inflows.

Emerging Markets Bond Funds investing in local currency debt were the biggest money magnets during the fourth week of November. YTD these funds have accounted for just shy of 40% of all flows into the overall fund group.

Balanced Funds, which invest in both bonds and equities, also remain popular with investors. The last time this fund group posted outflows was the final week of March and, since then, they have taken in over US$10 billion.