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EM, Japan and real estate funds among those escaping chilly start to February

After roaring through January a number of fund groups found themselves whispering in early February as investors took a step back and kicked the tyres on some of the rosier assessments for the Eurozone.

Although EPFR Global-tracked equity funds maintained their recent pattern by outgaining bond funds by margins of three-to-one or better – again with the help of retail investors – overall flows in both cases were a third of the previous week’s total.

Europe equity and bond funds, meanwhile, both posted outflows in the same week for the first time since late August.

While markedly more cautious in some areas, investors retained their appetite for emerging markets equity and bond funds. They also bought into Japan’s renewed efforts to rekindle growth, committed record setting amounts of money to floating rate bond funds for the second week running and steered over USD1bn into real estate sector, global equity and balanced funds.

Overall, equity funds absorbed a net USD6.56bn for the week ending 6 February while bond funds took in USD1.08bn and money market funds snapped a three week losing run on the back of solid flows into Europe money market funds.

At the country level there was some appetite for smaller and possibly oversold markets, with France equity funds snapping a lengthy outflow streak and frontier markets funds enjoying their best week since late 4Q10.

EPFR Global-tracked emerging markets equity funds extended their current inflow streak to 21 weeks and over USD65bn in early February. Diversified and China funds continued to attract the bulk of the new money but some fund groups dedicated to smaller markets such as Colombia, the Philippines and Vietnam also fared well.

Once again Asia ex-Japan equity funds outgained the other major regional fund groups. But inflows slipped to their lowest level since the third week of November as another solid week for China equity funds was more than offset by the biggest redemptions from Korea equity funds on record.

“Although the outflows were centred on a single Korea ETF, worries about Korean export competitiveness in the face of Japan’s aggressive efforts to weaken the yen saw three quarters of the Korea equity funds we track fail to attract any new money,” says EPFR Global research director Cameron Brandt.

There was some appetite for exposure to smaller Asian markets, with Vietnam and Philippines equity funds posting inflows for the sixth and 19th consecutive weeks while Thailand equity funds enjoying their third best week since the beginning of last year.

The attraction of smaller markets was also evident among Latin America equity funds, with Colombia equity funds recording their second highest weekly inflow on record which topped the amounts pulled in – or surrendered – by the other regional country fund groups.

With concerns about the Eurozone underpinning the more cautious mood among investors, EMEA equity funds experienced their biggest weekly outflow since mid-May as redemptions from Emerging Europe and Turkey equity funds hit 10 and 104 week highs respectively.

Despite a sharp correction in European markets EPFR Global-tracked developed markets equity funds collectively post inflows for the ninth straight time in early February, their longest run since a 12 week streak that ending in late January 2004. Investors showed a marked preference for diversified exposure with global equity funds absorbing another USD1.9bn. But they also showed some appetite for Japan’s export story in light of recent moves to weaken the yen.

The efforts to make Japan’s currency more competitive for exporters is part of a package of largely familiar measures by new Prime Minister Shinzo Abe’s new government to kick-start the world’s third largest economy. And, so far, it has been successful with the yen recently hitting two-year lows versus the US dollar. Investors are taking notice. Flows into Japan equity funds hit a 34 week high and retail commitments climbed to levels last seen in 2Q06.

For Europe equity funds, currency strength is cutting the other way. Fears that an appreciating euro will add to the headwinds facing Eurozone exporters prompted investors to pull back from the region during early February. While overall redemptions for the week from Europe equity funds were a modest USD264m, daily data showed redemptions accelerating as the week progressed. Despite this, investors did see some value in a market, France, which they shunned for most of 2012. Flows into France equity funds hit their highest level since 3Q11 as a 19 week outflow streak came to an end.

US equity funds posted minimal outflows overall as retail investors pulled money out of these funds for the first time this year. Modest commitments to small and mid cap funds were eclipsed by redemptions from large cap funds during a week when growth-style funds outperformed their value counterparts across all capitalisations.

Investors continued their love affair with real estate, pushing year-to-date flows into EPFR Global-tracked real estate sector funds close to the USD4bn mark. Seven of the other 10 major sector fund groups also pulled in over USD100m while infrastructure and telecoms sector funds were the only ones to experience net redemptions.

The real estate sector is currently benefiting from a number of tailwinds that include the general search for higher yield and lower volatility, better data emerging from key markets and the US Federal Reserve’s focus on the US mortgage and housing markets. With its health and those of many financial institutions’ balance sheets closely intertwined, financial sector funds continue to benefit as well: their current 10 week inflow streak is the longest since a 24 week run that ended in early September 2001.

Another source of exposure to the tangible, commodities sector funds, posted inflows for the first time in three weeks despite further redemptions from gold and precious metals funds. Copper prices recently hit a four month high and the outlook for agricultural commodity prices remains bullish because of extended droughts in key producing regions.

The least loved sector fund group in 2012, utilities sector funds, posted their second biggest weekly inflow since the beginning of last year as they took in fresh money for the third time in the five weeks YTD.

Fixed income investors looking to boost returns in early February focused on emerging markets local currency debt, bank loans and funds and funds with a bit of equity in the mix. They took a big step back from junk bonds, with EPFR Global-tracked high yield bonds seeing their biggest collective outflow in 11 weeks as Europe high yield bond funds’ 27 week inflow streak came to an end.

It was a tough week for Europe bond funds in general as investors focused on the political headwinds facing Eurozone governments that have tried to get public finances in some kind of order. Both Italy and Germany’s governments face the voters this year and the popularity of Spain’s government continues to plummet. At the country level UK bond funds posted their biggest outflow since mid-October while Sweden bond funds attracted another USD100m.

At the asset class level another of last year’s winners, mortgage backed bond funds, posted outflows while floating rate bond funds – also known as bank loan funds – took in over USD1bn for the second week running.

Emerging markets bond funds maintained their recent pattern of inflows that favours local currency funds over hard currency ones, Emerging Asia over Latin America and the EMEA region and China over other Asian markets. Flows into emerging markets local currency bond funds hit their highest level since EPFR Global started tracking them in 1Q04 while redemptions from hard currency funds hit a seven month high.

Balanced funds, which invest in both fixed income assets and equities, saw YTD inflows climb past the USD6bn market as they extended their strong start to the year.

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