March 20, 2012

Bonds Still Going Strong; Equity Flows Bounce Back

Japan flows remain volatile, and investors are leery about putting money into China, says EPFR Global

Bond inflows just set a weekly record at close to $7.6 billion, despite signs that some fixed-income returns are faltering, EPFR Global said Monday. The research group also notes that, during the week ended March 14, equity funds had a solid week of flows as the stock markets rallied, in a reversal of the previous week’s $4.3 billion in new outflows.

"ETFs certainly provide investors with the quickest way to tap into the latest bounce in global equity markets," said EPFR Global research director Cameron Brandt, in a statement. "But, given the timing, some of the money may be looking to benefit from the quarterly rebalancing of many funds at the end of this month."

The bond categories with the strongest flows last week were high yield, emerging markets, municipal and mortgage-backed bond funds, the Boston-based research group says. They were again to the fore as “the U.S. and Japanese central banks reaffirmed their commitment to ultra-low interest rates,” according to the group’s latest report.

As for equities, Japan-themed products saw inflows jump to their highest level since August 2011, as the benchmark Nikkei index topped 10,000. Over 90% of new inflows went into ETFs.

"Flows have been quite volatile in recent weeks, reflecting the tension between an improving outlook for export plays and the Bank of Japan’s asset buying program on the one hand and the lack of credible political leadership on the other," Brandt explained.

Bond Boom

Mortgage-backed bond funds have taken in fresh money every week for over a year. Meanwhile, year-to-date flows into high-yield bond funds are nearing the $24 billion mark. Emerging-market bond funds posted two of their four biggest weekly inflows since the beginning of February.

Europe and EMEA Europe, Middle East and Africa bond funds snapped outflow streaks of three and 10 weeks “on the heels of the ECB’s latest intervention,” said EPFR Global, as global bond funds experienced inflows for the 12th week in a row.

U.S. bond flows remain concentrated in municipal, mortgage-backed, corporate high-yield and intermediate-term debt, which accounted for more than 70% of the previous week’s inflows. Flows into the high-yield and municipal categories, though, are slowing from February levels.

Emerging bond funds were the fourth best on record, “reflecting their position as the best performing pure fixed-income fund group year to date,” ahead of high-yield, says EPFR Global. Their performance, however, still lags that of balanced funds (invested in both fixed-income assets and equities), which have a 7.8% gain for 2012 through mid-March.

Equity Movement

Investors pumped more than $3 billion into global-sector funds and retained their appetite for alternative and dividend-equity funds. They also committed the most money to Japan equity funds since mid-3Q11, while pulling money out of Europe equity products ahead of the official approvals of Greece’s latest bailout package. Furthermore, investors remained leery of fund groups with significant exposure to China.

Still, flows into the diversified global emerging-market equity fund group last week suggest that broad-based support for this category remains intact, according to EPFR Global. China’s recent lowering of its 2012 GDP target, however, helped spur back-to-back weeks of outflows for Asia ex-Japan equity funds year to date.

Korea equity funds, which have benefited in the past from the growing share of Korea’s trade going to China, posted their biggest weekly outflow since 4Q07.

Latin America equity funds, though, were “buffered by the continued improvement in the U.S. economy,” the research group said, and took in fresh money for the seventh time in nine weeks.

Also, Russia equity funds attracted new money for the seventh week in a row as oil prices remained high.

Sector Funds

EPFR Global-tracked sector funds drew more than $3.4 billion during the second week of March. Outflows were reported in only two of 11 groups – telecoms and infrastructure. Consumer-goods sector funds saw the biggest inflows, taking in more than $900 million.

Industrial, financial and energy-sector funds absorbed more than $500 million for the week, and utility funds snapped out of their five-week losing streak.

Funds specializing in gold and precious metals accounted for the bulk of the flows into the commodities-sector funds, despite the recent drop in gold prices.

Bond inflows just set a weekly record at close to $7.6 billion, despite signs that some fixed-income returns are faltering, said EPFR Global on Monday. The research group also notes that, during the week ended March 14, equity funds had a solid week of flows as the stock markets rallied, in a reversal of the previous week’s $4.3 billion in new outflows.

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