BOSTON, January 7 - Equity funds tracked weekly by Emerging Portfolio Fund Research saw investors pull a substantial $2.62 billion out in the first week of 2005, with all of the outflows coming from US Equity and Global/International Equity Funds. Meanwhile, all Emerging Market Equity Fund groups enjoyed net inflows during the week and the strong flows into Emerging Market Bond Funds that were noteworthy in December continued into the first week of January despite a sell-off in emerging market debt.
The week ending January 5 was the worst week of outflows for equity funds since the week ending May 12, when investors withdrew $3.03 billion from equity funds. The culprit in both episodes appears to be a sudden shift in market sentiment towards fears of faster interest rate hikes than previously expected.
US Equity Funds were responsible for $2.36 billion of outflows during the week, their worst weekly outflow since the week ending May 5. These funds took in a total of $6.85 billion of inflows in 2004. The Global/International Equity Funds had outflows of $770.36 billion, their worst weekly outflow since November, 2003. It was a disappointing start following last year’s net inflows of $17.23 billion.
EPFR tracks US Equity Funds with $761.08 billion and Global/International Equity Funds with $296.72 billion in assets on a weekly basis. These include funds registered in the US and in other major fund domiciles such as Luxembourg, Ireland, Cayman Islands, etc.
The combined Emerging Market Equity Funds tracked by EPFR weekly took in $292.95 million during the week. These funds - which include the diversified Global Emerging Market Equity, Asia ex-Japan, Latin America, and EMEA equity funds - absorbed net inflows of $2.78 billion in 2004.
“The release of the Fed minutes from the mid-December meeting, showing growing concern over inflation, may have spooked investors this week, but some of the fund flows were also the result of end of year asset allocation decisions,” says Brad Durham, a managing director of EPFR. “Rate hike fear are hurtful to emerging markets as aversion to risk increases, but the fact that all EM equity and bond fund groups saw net inflows during the week shows that end of year allocation decisions are favoring these funds.”
Investors pumped $92.2 million into Japan Equity Funds, the first weekly inflow recorded by these funds since November 24. Japan Equity Funds tracked weekly by EPFR took in a record-setting $8.49 billion of net inflows from investors in 2004, which increased their total assets by 52% to $29.44 billion. Europe Equity Funds took in $163.72 million of fresh money from investors during the week despite the euro weakening against the dollar.
Bond Fund Flows: Global bond funds treated to a New Year’s correction
Low yields, high prices and a stronger dollar all took their toll on global bond funds going into the New Year. Debt prices and investment flows came under pressure as investors took profits on fully valued portfolios and rotated them into higher yielding debt. At the same time a brief rally by the battered US currency, which clawed back some of the forex gains these funds have enjoyed during 4Q04, added to their pain.
Between December 30 and January 5 the 338 Global Bond Funds tracked on a weekly basis by EPFR collectively posted net outflows of $15.2 million, a forex loss of $444.1 million and portfolio losses of $615.3. The portfolio loss was the first since the second week in October, ending an 11-week run of gains that added $4.07 billion to the funds’ value.
“European markets contributed heavily to this trend,” said EPFR senior analyst Cameron Brandt. “Already viewed as expensive, it came under pressure early in the New Year as investors braced for a surge in supply and expectations about the pace of US interest rate hikes shifted again, this time towards more aggressive tightening.” Yields, which move in the opposite direction of prices, tend to follow US interest rates.
For yield-hungry investors, however, modest increases in the payout from Eurozone bonds will still leave them lagging riskier assets. Flows into dedicated emerging markets remained strong. The 248 tracked by EPFR took in a net $213.3 million for the week. That is the tenth straight week in positive territory, during which the funds have taken in a total of $1.97 billion in new money.
Emerging markets spreads remain tight - the EMBI+ was around 375 points higher than US Treasuries at the end of the first week in January – and issuers are expected to front-load their borrowing programs this year to take advantage. Expectations of heavy supply, and the sense that current prices leave little upside given the latest expectations for US interest rate trends, are starting to weigh on sentiment: the value of the EPFR-tracked funds’ collective portfolios slipped 0.56% for the week.
High Yield Funds, meanwhile, took in $275.3 million for the week. Valuations in this sector are not quite so rich, and the underlying fundamentals of the companies and countries issuing them are, in general, improving. The collective portfolios of 210 high yield funds tracked by EPFR shed only 0.06% of their value for the week.
ABOUT EPFR
Cambridge, Massachusetts-based Emerging Portfolio Fund Research, Inc. (EPFR) tracks equity and bond fund flows, cross border capital flows, country and sector allocations, and company holdings data from its universe of 7,000 international, emerging markets and US funds with more than $3 trillion in assets. EPFR data comes directly from funds or their administrators and includes funds registered in the major domiciles of North America, Europe, Asia and other offshore domiciles. The data shows trends in global institutional and individual investor sentiment and is used by top emerging markets and international analysts, strategists and portfolio managers. The firm also provides investment management clients with qualitative analysis on international markets and operates EmergingPortfolio.com, an Internet site for institutional investors in emerging markets and listed in Forbes Best of the Web.
CONTACTS
Brad Durham
Managing Director
Email: durham@epfr.com
Tel: (+1-617) 864-4999, x. 24
Ian Wilson
Director, Fund Data
Email: ian@epfr.com
Tel: (+1-804) 677-2737
Cameron Brandt
Global Markets Analyst
Email: brandt@epfr.com
Tel: (+1-617) 864-4999, x. 22