Emerging markets’ equity funds and the energy sector saw record inflows of $41.5 billion (Dh152.3bn) in 2007, according to a report issued by US-based EPFR Global (Emerging Portfolio Fund Research).
Brad Durham, Managing Director at EPFR, told Emirates Business that 2007 was “the strongest year for flows into these funds in dollar terms since we started tracking fund flows in 1995.
However, 2005 was stronger as percentage of total assets [15.7 per cent in 2005 versus 12.4 per cent in 2007]”.
Durham said the funds’ total assets stood at $2bn and took in about $430 million of net inflows in 2007. “This is significant as a percentage of total assets of this fund group. And these funds have received net inflows for 16 consecutive weeks to January 2, 2008.”
EPFR Global provides fund flows and asset allocation data to financial institutions around the world, and tracks both traditional and alternative funds domiciled globally with $10 trillion in total assets.
The year-end report mentioned that worries about the US economy and the impact it will have on sub-prime crisis and high oil prices did surface early in the new year. Daily data for the first two trading days of the year, January 2 and January 3, showed investors pulling money out of major equity fund groups and some of the bond fund groups, and funnelling it mainly into money market funds, which received more than $10 billion of net inflows in the first two days of the year.
The year-end flow numbers for fund groups tracked daily and weekly remained in line with the overall theme for 2007 – a massive rotation of funds geared to developed markets into those aimed at [or exposed] to emerging markets. Net flows into the GEM and Latin America equity funds tracked weekly by EPFR Global were 380 per cent and 308 per cent of their 2006 totals, while combined flows for US, Japan and Europe equity funds were $66.9bn lower compared to 2006.
At the country level, Russian funds extended their winning run to 16 straight weeks, mirroring Middle East funds performance, and Brazil country funds closed the books on a year that saw them post inflows that were nearly six times their 2006 total. But investors continued booking the profits generated by China’s frothy equity markets, with China country funds again seeing outflows despite their 75 per cent collective portfolio gain for the year. A notable theme was the shift away from hard currency emerging markets bond funds to their local currency and blended counterparts.
Durham wrote in the report: “We will not have the final and complete picture until we have the end of December data, but I do not expect that to change any of the broader trends, although it will show even stronger flows into global equity funds, stronger outflows from the US equity funds, and may bring the surprising flow numbers for financial sector funds a little more in line with their performance.”
EQUITY FUND FLOWS
At the end of December emerging markets funds saw modest inflows as the $1.96bn committed to GEM and EMEA Equity Funds more than offset the $433m pulled out of Asia [except Japan] and Latin America funds.
Investors pulled modest amounts out of these fund groups during the first trading day of the 2008. “Data at this time of year tends to be influenced by year-end book-keeping, window dressing and maybe some initial asset allocation positioning for the coming year,” Durham noted in the report.
“But the big picture for 2007 is unequivocal – a broad re-rating of emerging markets assets that has prompted a big rotation out of developed markets funds as investors seek to increase their exposure to places such as Russia, Brazil and Korea.”
While Latin America equity and Brazil country funds led the charge into the fourth quarter, GEM, BRICs (Brazil, Russia, India and China) equity and Russia country funds were the ones with momentum going into 2008. In the case of the GEM funds, 84 per cent of their 2007 net inflows came in the fourth quarter last year, while flows into both Russia country and BRIC funds were modestly negative through the first nine months of 2007 before taking off in the final quarter.
In performance terms, Latin America equity funds were the best of the major emerging markets fund groups, while Brazil, China, Turkey and Africa regional funds stood out among the smaller fund groups.
US EQUITY FUNDS
In late December, US equity funds posted their third straight week of solid inflows, absorbing another $7.14bn and taking total inflows during this run to $27.8bn before investors pulled $7.72bn out over the final three days of 2007 and nearly $4bn on January 2. In keeping with the broad trend since August, funds managed for growth largely outperformed their value counterparts in both flow and performance terms.
During the week ending January 2, Europe and Japan equity funds remained under pressure as investors sought to avoid the effects of a slowdown in US demand for exports from both regions or simply went looking for better performance. Japan’s equity funds posted net outflows for the 39th time in the past 40 weeks as the country’s benchmark index ended 2007 down about 11 per cent for the year.
The slowing economic growth, lack of confidence in the government and the sluggish pace of restructuring at both the government and corporate levels have soured both foreign and domestic investor sentiment towards the world’s second largest economy. Europe equity funds, meanwhile, saw another $1.46bn head out the door between December 20 to December 30.
Investors have now pulled money out of these funds for 18 straight weeks, taking 2007 outflows over the $35bn mark – an amount that roughly equals the currency and portfolio gains these funds have posted for the year.
Eroding consumer confidence, the pressure currency strength is putting on exporters, tighter credit and high oil prices have taken the shine off the Eurozone’s prospects for 2008. Pacific equity funds also did not fare well.
These funds ended the year with modest outflows as their high exposure to Japan’s lacklustre equity market continued to weigh on investor sentiment towards them despite the double-digit gain they chalked up for the year.
Energy sector funds ended the year with a flourish, absorbing more than $1.7bn during the 12 days ending December 31 and halving their net outflows for a year that saw them post the largest gain on their collective portfolios among the major sector fund groups tracked by EPFR Global. With oil prices breaking the $100 a barrel threshold, these funds absorbed another $462m on January 2.
The second best performer, commodities sector funds, were rewarded by net inflows of $5.5bn for the year as investors bet the commodities cycle has yet to peak and looked for ways to offset the weakness of the US dollar, bidding gold up to record highs this week. Healthcare and biotechnology, and financial sector funds also begin the year with some momentum.
The former have absorbed new money five of the past six weeks; the latter took in 49 per cent of their 2007 inflows during December including a solid $460m during the final 12 days and $244m on January 2.
The only groups to see outflows during 2007 were telecom and real estate sector funds. Investors pulled another $26m out of real estate the last week of December, and ended 2007 with the worst flow and performance numbers of any sector fund group as the US real estate market continued its painful sub-prime induced correction.
BOND FUND FLOW DATA
The EPFR Global-tracked bond fund groups ended 2007 with a whimper. Investors pulled another $1.64bn from US Bond Funds, $276m from global bond funds, $236m from high yield bond funds and $95m from emerging markets bond funds. But during the first day that markets were open in 2008, US, Global and high yield bond funds posted modest inflows.
A combination of modest returns, worries about credit quality and the spectre of rising inflation caused a sharp about-face in fixed-income fund flows during 2007.
Only emerging markets and US bond funds ended the year with net inflows. In the case of the emerging markets funds, the bulk of the new money taken in flowed into local currency funds that accounted for 74 per cent of this group’s net inflows. “In addition to a shift by the better quality issuers towards local currency debt, investors also saw this as another way to sidestep US dollar weakness,” said Cameron Brandt, EPFR Global markets analyst.
For US bond funds, 2007 was a tale of two halves: net inflows of $9bn during the first half and net outflows of $2.8bn during the second. Global bond funds, meanwhile, experienced a $15bn swing from inflows to outflows compared to 2006.
Money market funds posted outflows during the fourth week of December, and ended the year with $9.2bn flowing out on December 31. But that still left net inflows into these funds for 2007 at $190.5bn.
Another “safe haven” fund group, balanced funds also had a very strong year. After posting outflows of $4.1bn in 2006 these funds, which offer some exposure to equities, took in a net $8.64bn during 2007 and started off 2008 by absorbing another $112m, said EPFR Global report.
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