More money in emerging markets

All of the major equity and bond fund groups tracked by EPFR Global and geared primarily to developed markets posted net outflows in the week through September 5, as investors put their faith in cash and emerging markets.

They were especially comfortable with emerging Asian markets, committing $731 million to China, Greater China and Hong Kong Country Funds as part of $1.25 billion worth of flows into Asia ex-Japan Equity Funds.

Asia ex-Japan Funds have been this year’s best performers. According to EPFR Global, they have posted a collective year-to-date gain of 30.7% versus 6.3% for Global Equity Funds and a 5.4% loss for Japan Equity Funds. The $1.25 billion absorbed by Asia ex-Japan Funds was the sixth time in the past 10 weeks that they have posted net inflows in excess of $1 billion, and it brought the year-to-date total up to $4.74 billion.

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Flows this week were helped by the greater freedom granted to Chinese investors, with foreign money flowing to markets such as Hong Kong that are expected to benefit. However, it is still well off last year’s pace, when these funds ended the year with net inflows of $16.7 billion.

Meanwhile, Global and US Bond Funds and US, Japan, Europe, Global and Pacific Equity Funds posted collective outflows of $8.11 billion with two thirds of that total coming from US Equity Funds.

“I think this is proof, if it was needed, that investors and fund managers are now judging emerging markets on their own merits rather than seeing them as a tail wagged by the US and Eurozone economies,” said EPFR Global Managing Director Brad Durham. “In addition to the fact these markets are now getting some of the safe-haven flows, we’re seeing a shift to quality within the asset class. And that quality, as far as investors are concerned, is in Asia.”

Optimism about emerging Asia’s prospects again translated into strong commodity prices and fresh inflows into Latin America Equity Funds. Year-to-date flows into these funds are now double last year’s total, although their performance gain of 26.4% lags the 46.5% these funds posted for all of 2006.

Among the fund groups geared to developed markets Japan Equity Funds suffered the biggest outflows when measured as a percentage of assets under management. The $445 million redeemed by investors brought year-to-date outflows up to $9.67 billion, compared to outflows of just $250 million last year and inflows of $13 billion in 2005.

Weak business investment figures and fears that a stronger yen will hobble the key export sector are but some reasons that investors refuse to buy into Japan’s slow but steady GDP growth.

Elsewhere, the diversified Global Emerging Markets (GEM) and EMEA Equity Funds both posted modest inflows for the week. The EMEA funds remain the worst performers, in both performance and flow terms, year-to-date among the fund groups geared to emerging markets.

This is largely due to the concentration of countries with large current account deficits - Hungary, South Africa, Turkey and Egypt - within this region and the fact that a string of investor-unfriendly actions has undercut sentiment towards Russia despite its huge oil and foreign exchange reserves.

The other diversified fund groups focusing mainly on developed markets, Global Equity Funds and Europe Equity Funds, also posted modest outflows as investors waited to see what the European Central Bank would do at its September 6 policy meeting. The Eurozone’s central bank left its key rating on hold, which could prompt investors to view some of the regions’ equities as oversold.

Investors in the US, meanwhile, continue to anticipate a rate cut before the end of the year — hence the paradox that, while investors continue to pull money out of US Equity Funds, the Growth oriented funds outperformed their Value counterparts across all capitalisations (large cap, mid cap, and small cap) for the seventh time in the past eight weeks.

That counterintuitive growth theme is also evident at the sector level, where Global Technology Sector Funds took in $213.9 million, the 10th time in the past 11 weeks they have absorbed fresh money. But fears about a credit squeeze battered Real Estate and Utilities Sector Funds again, with investors removing $310 million and $453 million respectively.

Energy Sector Funds were the week’s big winners as US inventories shrunk and rising tensions in the Middle East pushed oil prices close to their record highs. These funds absorbed a net $880 million.