Globe and money

Banner year for bond funds ends with a whimper

With the so-called fiscal cliff ahead and a year that saw many of the world’s equity markets post double digit gains behind, investors hunkered down during the final days of 2012 with only emerging markets equity funds seeing significant amounts of new money.

EPFR Global-tracked bond funds, which averaged net inflows of USD9bn a week on their way to a new full year inflow record, took in only USD419m during the week ending 26 December. Equity funds absorbed USD3.6bn as retail investors again refused to chase gains, especially in developed markets.

Provisional full year totals, based on combined monthly, weekly and daily data, show a slew of bond fund groups setting new inflow records. They include US, high yield, emerging markets, mortgage backed, Canada and Australia bond funds.

Outside the fixed income universe, Mexico, Colombia and Philippines equity, long/short, derivatives, real estate and healthcare/biotechnology sector and dividend equity funds also posted record inflows while Canada, UK, France, Germany and Taiwan equity funds set new outflow marks.

As a quarter that saw fresh rounds of monetary stimulus from all of the world’s major central banks wound down, flows into several of the year’s hotter fund groups - among them high yield and municipal bond funds - were stumbling while commitments to fund groups associated with developed Europe, emerging markets, real estate and China gained momentum.

EPFR Global-tracked emerging markets equity funds carried a 16 week inflow streak into 2013 as they wrapped up their best quarter, in flow terms, since 4Q10. Enthusiasm for emerging markets in general and China in particular continued to drive flows in late December, with both Asia ex-Japan and the diversified global emerging markets equity funds taking in around USD1bn during the week. Retail investors, who pulled money out of EM equity funds 33 of the 35 weeks between the beginning of March and the end of October, were net contributors for the sixth straight week.

Asia ex-Japan equity funds, which struggled to attract fresh money during the second and third quarters, were buoyed during the final three months of the year by the rebound in the Chinese economy which also helped China equity funds enjoy their best quarter in over a decade. Flows into Korea equity funds also picked up late in the year as the country’s December presidential election resulted in victory for the more business friendly candidate.

The flows enjoyed by China equity funds stood in marked contrast to those posted by dedicated BRIC equity funds and by the fund groups dedicated to the other BRIC (Brazil, Russia, India and China) markets. Brazil equity funds were outgained by Mexico equity funds for the first time since 2004 and Russia equity funds saw flows stumble in tandem with energy prices.

While appetite for BRIC equity funds theme continued to wane, the other major emerging markets themes fared better in 2012 with funds under the MIST (Mexico, Indonesia, South Korea and Turkey) umbrella ending the year strongly.

Among the major regional groupings EMEA equity funds faced the most consistent headwinds, many of which have been blowing since the "Arab Spring" roiled the Middle East in early 2011. Conflicts in Syria and Gaza, the Eurozone’s long running debt crisis, Egypt’s struggles to form a new government, violent labour unrest in South Africa and weaker commodity prices all took their toll.

Another mixed year for EPFR Global-tracked developed markets equity funds ended with Japan equity funds recording their biggest yearly inflow since 2005, Europe equity funds extended their longest inflow streak since 4Q10 and US equity funds posting back-to-back weeks of inflows for the first time since mid-September.

Of the initiatives launched by the US Federal Reserve, the Bank of Japan and the European Central Bank since late 3Q12, the latter’s pledge to buy - under the right conditions - unlimited quantities of short term sovereign debt has generated the strongest response from investors. The ECB’s stance has restored the consensus, which evaporated mid-year, that the Eurozone will muddle through rather than breaking apart. Europe equity funds have now taken in money for five straight weeks and 11 of the past 16, with US-domiciled funds carrying an inflow streak stretching back to mid-August into the New Year. At the country level money has flowed strongly out of France, UK and Germany equity funds while Italy and Spain equity funds fared better during the fourth quarter.

The announcement of a third round of quantitative easing (QE3) by the US Federal Reserve and the subsequent linking of easing measures to the unemployment rate has a limited effect on US equity fund flows. After spiking in mid-September, flows were negative nine of the following 11 weeks as investors shifted their focus to the mixture of tax hikes and spending cuts slated to go into effect in 1Q13 if US policymakers cannot hammer out an agreement. Retail investors were net redeemers 50 of the year’s 52 weeks.

Japan equity funds, meanwhile, ended the year with another week of inflows as investors pencilled in a more competitive currency for Japanese exporters in the wake of the Liberal Democratic Party’s recent electoral victory. Overall, however, the year’s solid number owed much to flows into domestically domiciled ETFs. These took in over USD9bn, money that was widely viewed as part of the BOJ’s effort to support Japan’s equity market.

Appetite for diversified developed markets exposure waned during the fourth quarter, with global equity funds recording outflows all three months.

Although they lost momentum heading into the New Year, commodity sector funds attracted the biggest inflows among the 11 major EPFR Global-tracked sector fund groups for the fourth consecutive year. But it was real estate sector funds, buoyed by the US Federal Reserve’s quantitative easing programmes, which finished 2012 on a high as they took in another USD746m that pushed them deeper into record setting territory.

The efforts of the Fed and central banks in Europe, China and Japan also bolstered flows into financial sector funds. These funds enjoyed a solid year - their best since 2008 - despite plenty of evidence that earnings remain under pressure from regulation, slowing growth and more aggressive taxation.

Investors remain sceptical that quantitative easing alone will rekindle economic growth. If gold and precious metals funds are factored out, commodities sector funds experienced net redemptions during the fourth quarter as did energy and technology sector funds. Overall, gold and precious metals funds accounted for 86 per cent of total inflows into all commodities sector funds. That compares with 73 per cent in 2011, 49 per cent in 2010 and 23 per cent in 2009.

Among the fund groups viewed as being more defensive healthcare/biotechnology sector funds ended the year in record setting territory and flows into consumer goods sector funds gained some momentum. But utilities sector funds, which set an inflow record in 2011, posted record setting outflows.

Total flows into EPFR Global-tracked bond funds during 2010 equalled 135 per cent of the previous record set in 2010 as investors gravitated to fixed income assets in their search for yield. Retail investors were net contributors 49 of the year’s 52 weeks as most fund groups and sub-groups handily eclipsed the flow marks they set in 2011. Among the few exceptions were long and short term government, inflation protected and Germany bond funds.

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