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Globe and currency signs

Municipal bond fund flows take a tumble as talks to avert fiscal cliff rumble on

Municipal bond funds tracked by EPFR Global saw redemptions hit their highest level in 23 months during the third week of December, snapping a 68 week inflow streak along the way, as speculation that municipal debt’s tax exempt status could be a casualty of any agreement to head off the mixture of spending cuts and tax hikes due to kick in early next year spooked investors.

Municipal bond funds were not the only fund group to post striking flow numbers as investors responding to shifting perceptions of how the fiscal cliff negotiations will play out, took profits and positioned themselves for the year-end holiday season. Redemptions from real estate sector, Europe bond and US bond funds were the highest in 24, 27 and 72 weeks respectively while France equity funds recorded their biggest outflow since 2Q08. Canada, Korea, Mexico and Peru equity funds, meanwhile, posted their biggest weekly inflows in over a year.
Overall, EPFR Global-tracked bond funds recorded net redemptions of USD4.1bn during the week ending 19 December, the most since early August, 2011, while equity funds took in USD5.56bn. Investors pulled USD18.8bn out of money market funds – a seven week high – with Europe money market funds accounting for some 60 per cent of that total.
Dividend equity funds, another group caught in the sound and fury surrounding the fiscal cliff negotiations, posted modest inflows for the week but continue to lose momentum going into 2013.
Investors kept faith with emerging markets during the third week of December as fears about a hard landing for China’s economy are giving way to upward revisions for 2013 growth forecasts. EPFR Global-tracked emerging markets equity funds attracted fresh money for the 15th consecutive week, their longest inflow streak since a 29 week run ended in 4Q10, with both Asia ex-Japan and the diversified global emerging markets equity funds taking in over USD1bn for the fourth week in a row and EMEA equity funds snapped a 10 week outflow streak.
Although China equity funds again eclipsed all of the BRIC (Brazil, Russia, India and China) peers and remained on course for their biggest quarterly inflow in over a decade, they were second to Korea equity funds among Asia country fund groups with the latter posting their biggest weekly inflow on record. South Korea elected its first female president this week and President-elect Park Geun-hye is regarded as the more business friendly of the two major candidates.
EMEA equity funds, meanwhile, benefited from the growing optimism that the Eurozone has finally got a credible grip on its long-running debt crisis, enthusiasm for Turkey’s economic story and the durability of the Israeli-Hamas ceasefire in Gaza. Emerging Europe regional equity funds posted back-to-back weekly inflows for the first time since early October while Middle East & Africa equity funds recorded their biggest inflow since the second week of April.
Flows into Latin America equity funds favoured Mexico and Peru at the expense of Brazil, with Peru and Mexico equity funds recording their biggest weekly inflows since 2Q11 and 1Q08 respectively. YTD Mexico equity funds have turned in by far the best performance, nearly doubling the 18.1 per cent gain chalked up by second placed Colombia equity funds.
For the second week running investors rewarded, albeit more cautiously, the Eurozone’s durability and hopes that the US will do what is needed to avoid the so-called fiscal cliff. US equity funds posted consecutive weeks of inflows for the first time since mid-September while Europe equity funds extended their longest inflow streak since early 2Q11.
Flows into US equity funds were concentrated in a few large cap ETFs as investors positioned themselves for the Christmas and New Year holidays. Retail investors pulled money out of this fund group for the 23rd straight week, however, as the to-and-fro negotiations over the tax and spending issues underlying the fiscal cliff took their toll. Another North American fund group, Canada equity funds, saw net commitments hit a 90 week high with a single ETF accounting for the bulk of the USD834m total.
Europe equity funds with a regional mandate fared well during the third week of December. But funds with a country focus struggled, none more so than French equity funds which saw redemptions soar to their highest level since 2Q08 as growth in the Eurozone’s second largest economy struggles to stay in positive territory. Investors did commit money to Italy equity funds for the 13th time in the past 15 months and US-domiciled Europe equity funds extended their current inflow streak to 19 straight weeks.
Japanese voters, meanwhile, packed the current government out of office and gave Shinzo Abe’s Liberal Democratic Party a working majority. Japan equity funds attracted fresh money for the sixth time in seven weeks as investors anticipate more stimulus spending, monetary easing and aggressive efforts to devalue the yen.
Redemptions from global equity funds, the major diversified developed markets fund group, hit a one year high.
EPFR Global-tracked sector funds struggled to attract investor interest and money, with only three of the 11 major fund groups posting inflows and none attracting over USD300m.
The US Federal Reserve’s latest easing measures and the Christmas shopping season translated into modest gains for financial and consumer goods sector funds and flows into utilities sector funds, the least loved sector fund group YTD, jumped to a 57 week high.
Among the fund groups posting outflows real estate equity funds were hardest hit, with over USD850m flowing out during the week despite more indications that the worst may be over for US residential and commercial real estate. Commodities sector funds recorded their second consecutive week of outflows as investors cashed in gains on gold and precious metals funds.
Technology, energy, healthcare/biotechnology, industrials, infrastructure and telecoms sector funds posted outflows ranging from USD11m to USD171m.
A retreat from US municipal debt sparked by concerns that it will lose some of its tax advantages in any fiscal cliff deal prompted investors to head for the exits in mid-December. The uncertainty about US fiscal policy also chilled appetite for US government debt and high yield bonds. Investors also decided to cash in some of their European gains – Europe bond funds have gained 2.2 per cent since the beginning of September – and take another look at bank loan funds.
Heading into the final full week of December US bond funds experienced their biggest weekly redemption since mid-3Q11 and municipal bond funds since 1Q11, outflows from Europe bond funds hit a 27 week high and both global and high yield bond funds posted modest outflows. Emerging markets bond funds did extend their current inflow streak to 28 straight weeks and flows into floating rate bond funds hit a 90 week high.
Funds dedicated to intermediate term and municipal debt accounted for the bulk of the overall outflows from US bond funds. Although government bond funds of all durations again experienced net redemptions, the amounts pulled out were down from recent weeks.
The outflows from Europe bond funds, meanwhile, snapped their longest inflow streak in over six years. Almost half of the total was attributable to Switzerland bond funds.

Among the emerging markets bond funds those with local currency mandates again out gained their hard currency counterparts, this time by a two-to-one margin, while China bond funds again stood out among the EM bond country fund groups.

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