Global Funds’ Record Year in Home Stretch, But Testing Year Ahead

KUALA LUMPUR: Global equity markets moved sideways in mid-December as investors began to close the book on 2009 and think about the prospects 2010,according to the latest report released by EPFR Global.

In its report issued late Thursday, Dec 17 it said the book on 2009 makes for generally good reading, with many fund groups posting good to excellent performance numbers and on course for record setting years in terms of attracting fresh money.

“But 2010 promises to be another testing year as fiscal and monetary stimulus in many of the world’s major economies begins to wane,” it cautioned.

EPFR Global provides fund flows and asset allocation data to financial institutions around the world. Tracking both traditional and alternative funds domiciled globally with US$12 trillion in total assets.

Much of the week ending Dec 16 saw choppy fund flows, but towards the end of the week, Abu Dhabi’s support of Dubai helped investors regain some of their risk appetite.

Investors pulled another US$37.5 billion out of Money Market Funds between Dec14 to 16, pushing year-to-date outflows well over the $500 billion mark, and channeled some of that money into the major bond fund groups, diversified equity funds and several major sector fund groups.

All Equity Funds took in US$3.38 billion for the week while All Bond Funds collectively absorbed $5.31 billion.

With two weeks of 2009 to go, combined monthly and weekly data points to record setting inflows for Global Emerging Markets (GEM), Asia ex-Japan and Latin America Equity, Commodity Sector and US, Global and High Yield Bond Funds, the first yearly inflow for Europe Equity Funds in over seven years and record outflows for US Equity and Money Market Funds.

Emerging Market Equity Fund Flows

Flows into the combined Emerging Market Equity Funds surpassed the US$75 billion mark in mid-December, well beyond the previous record of US$54 billion set in 2007. But flows slowed appreciably to $571.4 million in the week ending December 16 as investors waited for clues about the US Federal Reserve’s policy in early 2010 and for Dubai World’s debt problems to play out.  

GEM and Asia ex-Japan Equity Funds did absorb US$404 million and US$301 million respectively, but Latin America Equity Funds posted outflows for only the second time in the past three months and net redemptions from EMEA Equity Funds hit a six week high.

YTD GEM and Asia ex-Japan Funds are already comfortably ahead of the totals for their previous best years, with the former having now absorbed over US$39 billion and the latter US$24.7 billion versus the US$23.9 billion and US$20.3 billion they took in during 2007.

Latin America Funds are within striking distance of the US$10.83 billion they absorbed in 2007, but lost ground this week as concerns generated by Mexico ’s credit rating downgrade swamped the region’s commodity story.

Brazil Equity Funds did post inflows for the 13th time in 14 weeks, taking year-to-date (YTD) inflows deeper into record setting territory, as did funds dedicated to the other three BRICs markets.

India Equity Funds absorbed US$64 million for the week, nudging them ahead YTD of the US$3.4 billion they tallied in 2005, and the US$59 million taken in by Russia Equity Funds was sufficient to move them YTD ahead of the US$1.6 billion they took in last year. China and dedicated BRIC Equity Funds also look set to establish new inflow records this year.

EMEA Equity Funds, the one emerging markets fund group not expected to have a record setting year, suffered during the latest week from its exposure to the Middle East – at least until Abu Dhabi stepped in to support Dubai – and from another bout of jitters about the willingness and ability of banks based in the big developed European countries to keep lending to emerging European businesses and consumers.

US, Global, Europe and Japan Equity Fund Flows

Flows into EPFR Global-tracked Europe, Japan and US Equity Funds remained subdued during the second week of December ahead of the US Federal Reserve’s meeting, with safe haven flows into these fund groups tempered by concerns about the state of public finances Japan, the US and Eurozone.

Flows into Japan Equity Funds did, however, hit a YTD high of US$248 million despite the buffeting business confidence in that country has taken from the strength of the yen and the uncertainty about the new government’s policymaking. While this fund group is on track to end the year with net outflows of around US$7.5 billion, that will be less than a third of the record outflows they posted in 2007.

Europe Equity Funds, which have posted seven straight years of outflows since 2002, are creeping towards the year’s end with about US$2 billion of net inflows.

“But headwinds are building again as German manufacturing stumbled in November, the credit rating agencies pull out the knives and a major Austrian bank was nationalized,” it said.

US Equity Funds, meanwhile, snapped a three week losing run as they absorbed US$1.69 billion for the week.

Those inflows, some of which may be tied to investors seeking arbitrage opportunities from the quarterly rebalancing of major exchange traded funds (ETFs), will do little to prevent 2009 going in the books as the worst in flow terms for this fund group.

YTD outflows now stand at US$84.7 billion compared to the US$74 billion in net redemptions recorded last year.

Global Equity Funds one of the two major diversified fund groups that invest primarily to developed markets, continued their strong finish to the year as they absorbed another US$902 million that took YTD inflows over the US$17 billion mark.

That is still well short of the US$87 billion this fund group took in during 2007. Pacific Equity Funds posted inflows of US$21 million for the week but look set to fall just shy of the US$1.56 billion inflow record they set in 2006.

Sector Funds

Flows into EPFR Global-tracked Commodity Sector Funds rebounded during the second week of December, with these funds taking in another US$683 million as YTD inflows climbed towards the US$17 billion mark, and Utilities Sector Funds had their best week of the year as they took in US$525 million.

Regulatory and legislative trends continue to shape year-end flows, with Utilities and Energy Sector Funds benefiting from the perception that the Copenhagen Climate Summit will not result in the immediate application of more stringent regulations, while Financial Sector Funds posted outflows for the fifth time in seven weeks as European finance ministers took aim at bonus payments.

Elsewhere, TECHNOLOGY [ ] Sector Funds enjoyed their best week since late July, taking in a net US$226 million, and Real Estate Sector Funds snapped their three week outflow streak as investors committed US$210 million.

Bond and other Fixed Income Funds

EPFR Global-tracked bond fund groups sustained the momentum they have built up since the second quarter going into the final two weeks of the year.

During the week ending Dec. 16, Global Bond Funds took in US$1.85 billion, their 36th consecutive week of inflows and the 14th straight week they have absorbed over US$1 billion.

US Bond Funds took in US$2.48 billion as YTD inflows moved over the US$140 billion mark. Flows were strong again into the Municipal Bond Funds, the year to date fund flow leader with record inflows of US$31.2 billion.

But investors also displayed their risk aversion by funneling money into Short Term Bond Funds, with nearly US$18 billion of YTD inflows, Short Term Government Bond Funds and Inflation Protected Funds. The latter fund group is sitting on inflows of nearly US$12 billion this year.   

The Intermediate Term Bond Funds, which invest in a mixture of corporate and government securities, and Intermediate Term Government Bond Funds were the only US bond fund subgroups seeing net outflows this week. These two groups have also fared the worst in fund flow terms among US bond funds this year, with Intermediate Term Government funds posting YTD outflows of US$2.6 billion.

Also setting a record are the High Yield Bond Funds which now look set to end the year having absorbed some US$30 billion in fresh money.

The one bond fund group that probably will not set a record in 2009, Emerging Markets Bond Funds, remain on track for their second best year after 2005 with the latest week seeing another US$522 million flowing into them. Funds focuses on local currency debt again accounted for the bulk of the week’s inflows.

Balanced Funds, which invest in both bonds and equities, continued their strong run as investors committed another US$344 million. – The Edge

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