From the August 2009 issue of Research Magazine • Subscribe!

August 1, 2009

Strong Q2'09 For Emerging Markets, Bond Funds

Emerging market equity funds absorbed $26.5 billion during the second quarter of 2009, while U.S. bond funds took in $20.2 billion, high-yield bond funds $7.7 billion and other fixed-income fund groups $8.4 billion, according to EPFR Global.

During the second quarter, $137.5 billion flowed out of money-market funds and about $7.6 billion left U.S., Europe and Japan equity funds, as the combined emerging market equity funds absorbed $26.5 billion. U.S. bond funds took in $20.2 billion, high-yield bond funds $7.7 billion and other fixed-income fund groups $8.4 billion, according to the research group EPFR Global.

The flows into emerging market equity funds surpassed the previous record for a single quarter, $22.4 billion in the fourth quarter of 2007.

There was a bit of a pull-back in early July, though, which EPFR Global attributes to fresh doubts about the U.S. appetite for emerging-markets exports and global demand for raw materials. Asia ex-Japan and Latin America equity funds gave up $365 million and $307 million respectively.

BRIC equity funds, however, fared well, taking in fresh money for the 16th consecutive week as year-to-date inflows approach $2 billion. And funds investing in the so-called frontier markets enjoyed a better week, with flows into Africa regional and Vietnam equity funds hitting year-to-date and seven-week highs respectively.

Fears that spring's green shoots could wither in the harsh light of the 2Q'09 earnings season weighed on developed markets and the funds that invest in them during early July, with U.S. equity funds recording outflows for a fourth- straight week and Europe equity funds for the seventh time in the past eight weeks.

Still, the two major diversified fund groups that invest primarily in developed markets both took in new money in early July, according to EPFR Global. Global equity funds absorbed $659 million and Pacific equity funds $84 million.

As for performance, emerging-market equity funds dominate the year-to-date Lipper reports. Many are up 50 percent or more through July 9.

The four major EPFR Global-tracked bond fund groups continued to attract investors in early 3Q'09 as the possibility of inflation, or stagflation, gained fresh attention.

"Recent flow data shows some real concern about inflation," explains EPFR Global senior analyst Cameron Brandt. "Inflation-protected bond funds, both global and U.S., or funds offering higher returns (emerging market, high yield and U.S. municipal bond funds) are the ones currently in favor, while funds specializing in longer-term debt or offering low returns are having a tougher time."

Data collected by the Financial Research Corporation shows that intermediate-term bonds have had estimated flows of nearly $42 billion in the year through May 31, and high-yield bonds have grown by an estimated $15.5 billion.

Several high-yield funds tracked by Lipper have returns of close to 30 to 40 percent or more through July 9.

Vanguard continues to top the fund charts in terms of assets, net of proprietary funds of funds, according to FRC. As of May 31, it had nearly $900 billion in funds, while American Funds had some $770 billion. Fidelity had $610 billion, while Barclays had about $295 billion. Fixed-income shop Pimco ranks No. 5 with $244 billion, followed closely by Franklin Templeton with $229 billion.

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