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Fund flows slump as US Federal Reserve finally pulls the trigger on QE3

Redemptions from EPFR Global-tracked bond funds hit a 24 week high in mid-December as the US Federal Reserve, announced that tapering of its current quantitative easing programme will begin in January.

The week leading up to the Fed’s decision also saw heavy redemptions from global equity and bond, balanced, gold and energy sector and emerging markets bond funds while Japan equity funds posted back-to-back weekly outflows for the first time since 4Q12.
 
“Our daily data shows that, in many cases, the bulk of the redemptions occurred before the Fed’s decision,” says EPFR Global research director Cameron Brandt. “So it’s not clear yet if it was uncertainty about the decision, or the decision itself, that drove the outflows.”
 
Overall, investors pulled USD9.41bn out of bond funds during the week ending December 18 and another USD3.41bn from equity funds. Redemptions from money market funds totalled USD35.2bn.
 
At the country level Korea equity funds posted record setting inflows, Spain equity and Spain bond funds continued to attract fresh money and Australia equity funds recorded inflows for the sixth time in the past seven weeks while China and Taiwan equity funds saw inflow streaks of six and seven weeks come to an end.
 
EPFR Global-tracked developed markets equity funds posted modest outflows for the second time in three weeks during mid-December as investors waited for the Fed to meet and make – or not make – a decision on winding down QE3. In contrast to the “taper tantrum” of late June, however, when investors pulled USD4.5bn out of North America equity funds and over USD400m out of Europe equity funds, redemptions for US equity funds were under USD200m while Europe equity funds posted their 25th consecutive week of net inflows. The nearly neutral flows for US equity funds, however, masked a shift from actively to passively managed funds that was most pronounced at the small and mid-cap levels. Overall, actively managed US equity funds posted their biggest collective outflow on record with small and mid-cap value funds the hardest hit in flows as a percentage of assets under management terms.
 
The winding down of QE3 does put European debt in a more favourable light, given the cocktail of low inflation, weak growth and a stubbornly strong currency the European Central Bank is factoring into its rate-setting decisions. Flows into Europe bond funds bounced back, snapping a two week outflow streak, and Europe high yield bond funds took in fresh money for the 24th consecutive week. At the Europe country fund level Spain remains the star of the show: YTD Spain bond funds have accounted for over 55 per cent of the total inflows recorded by all Europe bond funds.
 
With the Fed’s meeting on the horizon, investors pulled back from EPFR Global-tracked sector fund groups expected to feel the pinch when QE3 is wound down. Redemptions from commodities and energy sector funds hit 22 and 54 week highs respectively, outflows from real estate sector funds hit levels last seen in July and investors also took money out of technology, financials, utilities and healthcare/biotechnology sector funds. The outflows from commodities sector funds were largely driven by redemptions from gold funds as the price for an ounce of the precious metal slide towards the USD1,200 mark. But silver funds, whose fortunes are more closely tied to industrial output, have seen over USD1bn worth of inflows year-to-date.

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