From the August 2008 issue of Research Magazine • Subscribe!

August 1, 2008

U.S. Equities Get a Thumbs-Down, as Money Market and Overseas Funds Get Thumbs-Up

The first half of 2008 has hit the world's developed markets (United States, Japan and Western Europe) hard, with more than $100 billion in outflows, according to the Boston-based research group EPFR Global, which tracks funds with some $10 trillion in assets. U.S. funds had more than $58 billion in outflows, while West European funds lost $41 billion.

According to Lipper, the largest U.S. stock market indexes were down by as much as 14.44 percent during the first half of 2008 through June 26. By contrast, Japan's Nikkei 225 index declined 11.93 percent, but it actually rose 7.63 percent in the second quarter.

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Lipper's Q208 Wrap-Upo In June, equity funds suffered their worst one-month decline (-7.50%) since September 2002.o The average fund declined 9.86% for the six-month period ended June 30, 2008.o With the skyrocketing price of oil and other commodities, natural-resources funds (+24.50%) and commodities funds (+19.51%) topped the quarter's charts.

Source: Lipper/Reuters, July 2008

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"In the first half of this year the outflows from U.S., Europe and Japan equity funds have been staggering as investors pulled out nearly $105 billion -- by far the worst six-month period for these funds that we've ever seen," says EPFR Global Managing Director Brad Durham. "But in the second quarter Japan funds have come back into favor and finished the quarter posting eight straight weeks of net inflows even as global markets were crumbling. And the Middle East and Africa equity funds have kept their astounding inflow record spotless by attracting investor inflows every week this year."

The emerging markets had net outflows of about $12 billion in the first half of 2008, $10 billion of which was out of Asia-focused funds (excluding Japan). Latin American-funds had $1 billion in inflows during the same period.

Along with Japan-equity funds, other fund groups with some momentum going into the second half of 2008 are Russia equity funds (with net inflows of $3.2 billion in the first half of 2008), Vietnam equity funds, Middle East and Africa regional funds (with net inflows of $1.2 billion), financial and real-estate sector funds, U.S. municipal bond and balanced funds.

Money-market funds have experienced more than $96 billion in net inflows in early 2008 vs. inflows of $30 billion in the same six-month period of 2007.

"Investors are still showing an appetite for oversold markets and sectors," notes EPFR Global senior analyst Cameron Brandt. "Real-estate funds and financials certainly fall into that category. And, not surprisingly, oil producing regions and countries are faring well." These two sector-fund groups have had net inflows of $1.8 billion and $7.1 billion respectively in the first half of this year. Commodity-focused funds attracted $2.8 billion in the same period (vs. $1.6 billion in the same year-ago timeframe).

Going into the third quarter of 2008, says EPFR Global, EMEA equity funds remain the best performing among the major emerging-markets fund groups in terms of drawing new money, "as investors continue to seek exposure to Russia's resource story and the petrodollars flowing into Africa and the Middle East." The research group notes, though, that Latin America equity funds are benefiting "from soaring prices for Argentine wheat, Brazilian iron ore, Peruvian gold, Mexican oil and other regional resource exports."

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Janet Levaux, MBA/MA, is the managing editor of Research; reach her at jlevaux@researchmag.com.

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