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‘Great rotation’ takes another turn towards equity funds in late January

EPFR Global-tracked equity funds attracted another USD18.7bn during the final week of January, closing the books on a month when they outgained bond funds by a nearly three-to-one margin and fuelled talk of a “great rotation” from fixed income assets to equity.

Equity to bonds is not the only rotation underway. Retail flows into equity funds were positive for the fourth week running, keeping them on course for the strongest start to a year since 1Q06.

The tide of redemptions from actively managed equity funds that began in mid-2011 also continues to ebb.

The week ending January 30 also saw dividend equity funds post their biggest weekly inflow since mid-2Q10, alternative funds take in over USD500m for the fourth straight week and flows into floating rate bond funds hit their highest level in over five years. Emerging markets equity and bond funds maintained their strong starts to 2013, pulling in a combined USD5.12bn, with emerging Asia by far the preferred region.

Money market Funds recorded net outflows of USD12.16bn, their third straight week of outflows in excess of USD10bn, with Europe money market funds accounting for the bulk of those redemptions after two weeks of US money market funds leading the way.

Retail investors steered money into EPFR Global-tracked emerging markets equity funds for the 11th straight week during late January, with commitments hitting levels last seen in the period between 3Q10 and 1Q11, as YTD flows into this fund group climbed to 40 per cent of the full year total for 2012.

Once again the diversified global emerging markets (GEM) and Asia ex-Japan equity funds attracted the bulk of the new money. Flows into EMEA equity funds hit a 51 week high of USD212m while Latin America equity funds saw a four week inflow streak snapped.

The outflows from Latin America equity funds were driven by investor disenchantment with Brazil’s economic story, where looser monetary policy has done more to boost inflationary expectations than growth. Redemptions from Brazil equity funds hit their highest level in 36 weeks as investors continue looking to Mexico and Colombia for regional exposure. Since the beginning of 2H12 Colombia equity funds have posted inflows 27 of the 31 weeks while Mexico equity funds have now taken in fresh money for 10 straight weeks.
EMEA equity funds were helped by renewed flows into Russia equity funds, which had their best week since early October, and the current enthusiasm for Turkey whose average weighting among EPFR Global-tracked GEM equity funds was at a two year high coming into 2013.

Among the emerging markets’ themes, funds under the MIST (Mexico, Indonesia, South Korea and Turkey) umbrella took in fresh money for the 16th time in the past 17 weeks. But dedicated BRIC (Brazil, Russia, India and China) equity funds posted outflows for the 12th consecutive week as they extended a dismal run that has seen over USD7.5bn flow out since the beginning of 2011.

Flows into EPFR Global-tracked developed markets equity funds during the final week of January hit their highest weekly total since late 2Q08 as all five of the major fund groups posted solid inflows. Daily data showed a muted reaction to the news that US GDP growth had stumbled in the fourth quarter.

US equity funds pulled in over USD11bn as investors focused on some positive earnings news, the Fed’s ultra-loose monetary policy and more good housing market numbers. Institutional money combined with a fourth consecutive week of retail inflows to generate the biggest influx of new money in 16 months, with large cap blend ETFs faring best in both dollar terms and flows as a percentage of AUM terms.

Flows into Europe equity funds held to their recent pattern, with investors committing solid sums to regional fund groups while largely shunning single country funds. Once again Italy equity funds were the exception, with flows hitting their highest weekly total since the financial crisis despite an impending election that could repudiate the policies that have attracted recent portfolio flows.

Some encouraging industrial production data helped sustain the recent improvement in sentiment towards Japan, with YTD flows into Japan equity funds moving over the USD1bn mark as the country’s new government presses forward with its plans for reducing the cost of domestic capital and the value of the yen.

Global equity funds, meanwhile, saw over USD2.5bn flow in. The major diversified developed markets fund groups has absorbed USD10.4bn YTD compared to an outflow of USD2.5bn during the first month of 2012.

With plenty of bellwether earnings reports to digest, investors boosted flows into EPFR Global-tracked technology and sector funds to 59 and 27 week highs respectively, committed money to energy sector funds for only the second time in the past seven weeks and lifted YTD flows into real estate sector funds within striking distance of the USD3bn mark.

The strong flows into real estate sector funds, which are the highest since February 2007, have been sustained by accommodative monetary policy, better housing data from the US and the revenue streams generated by good quality commercial real estate. These trends are also helpful for financial sector funds. They have posted inflows for nine straight weeks, the longest such streak since the current financial crisis began, as investors translate a better housing market into fewer suspect assets on bank balance sheets.

Energy sector funds were helped by some decent earnings reports, especially on the refining side, from US oil majors and the resilience of oil prices. But, for the second week running, flows into funds focusing on industrial and soft commodities were not enough to offset redemptions from gold and precious metals funds, resulting in another week of net outflows for commodities sector funds.

Infrastructure, telecoms and utilities sector funds also posted outflows ranging from USD8m to USD62m.

Investors took a step back from Europe bond funds during the week ending January 30 but otherwise stuck to recent patterns when allocating money to EPFR Global-tracked bond funds. They committed fresh money to emerging markets bond funds for the 33rd straight week and to global bond funds for the 32nd time in the past 33 weeks, steered over USD600 million into high yield, total return, municipal and floating rate bond funds while pulling money out of US Government for the 10th consecutive weeks.

The redemptions from Europe bond funds were the third biggest since the beginning of 2012 and largely cancelled out the previous YTD inflows. It came on the heels of Portugal’s successful return to sovereign bond markets and a Spanish issue that was three times oversubscribed. “

The search for yield, meanwhile, has seen investors rotating away from junk bonds to bank loans. Flows into floating rate funds for the week were a record-setting USD1.12bn, almost double the amount absorbed by high yield bond funds.

US high yield funds were among the US bond fund sub groups posting outflows during the week, along with long term corporate, inflation protected and short term government bond funds. But US municipal bond funds recorded inflows for the fifth straight week with flows into California municipal bond funds sustaining the improvement triggered by recent votes to improve the state’s finances.

Emerging markets bond funds took in over USD1bn for the fifth straight week as local currency emerging markets bond funds again outgained their hard currency counterparts by a substantial margin.

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