US equity funds, money market funds and financial sector funds absorbed inflows in a memorable week when the Federal Reserve cut its discount rate by 25 basis points, slashed its benchmark federal funds rate by 75 basis points and supported the fire-sale of investment banking major Bear Stearns to rival JPMorgan Chase.
EPFR Global, which provides fund flows and asset allocation data to financial institutions around the world, said all of the other major equity fund groups posted outflows, as did emerging markets, global, high-yield and US bond funds.
There were signs of life in the commodities story over the Wednesday-to-Wednesday period, despite recent talk of bubbles. Commodity Sector Funds, Emerging Markets Local Currency Bond Funds, Russia Equity Funds and Brazil Equity Funds all absorbed fresh money as investors again looked for hedges to offset a dollar, which hit a record low versus the euro during the third week of March.
But investors appeared to be taking profits in commodity funds towards the end of the week. “While commodity funds had inflows for the week as a whole, our daily fund flow data shows investor outflows from commodity funds on March 18 and again on the 20th, consistent with the sharp sell-off in everything from precious metals to agricultural commodities starting mid-week,” said Brad Durham, EPFR Managing Director.
But sentiment towards Europe remains sour, with investors redeeming $3 billion (Dh11bn) out of Europe Equity Funds and pulling over $2bn out of Global Equity Funds, which have on average a 40 per cent exposure to the region. Withdrawals from Emerging Europe Regional Funds were also the main reason that EMEA Equity Funds posted outflows for the week.
With the Federal Reserve doing everything it can to prevent lack of credit from triggering a recession – even though many analysts believe a recession is already under way – United States equity funds received strong inflows during the week ending March 19.
While generally supportive of equities, the Federal Reserve’s actions put further pressure on the dollar, which hit a new low against the euro and a 13-year low versus the yen.
That suggests European and Japanese firms will have an even tougher time maintaining market share and profitability in the US, which absorbs 22 per cent of Japan’s exports and 24 per cent of the Eurozone’s.
Coupled with another round of profit warnings, that prompted investors to pull another $3.22bn out of European equity funds, bringing the year-to-date outflow total up to $21.8bn. With headline inflation at a 14-year high and wage growth accelerating, the European Central Bank has been downplaying the chances of an interest rate cut. In addition to a rapidly appreciating currency, the outlook for Japan has been clouded by the political deadlock, which has left the Bank of Japan without a governor.
But outflows from Japan Equity Funds were a modest $35m, versus a year-to-date weekly average of $477m, although that represented the 50th time in 51 weeks investors have removed money from these funds. Global and Pacific Equity Funds, the two diversified fund groups geared primarily to developed markets, both posted outflows for the week. The $2.27bn pulled out of Global Equity Funds took year-to-date outflows back $6bn – at this point last year this fund group had taken in a net $13.6bn.
For the second week running most emerging markets suffered as investors worried about the impact of dollar weakness on export competitiveness, although the commodities story softened the blow for Latin America and EMEA Equity Funds.
Asia ex-Japan funds were hit hardest, posting outflows of $1.2bn for the week as performance was off 7.6 per cent. Investors also pulled $363m out of the diversified Global Emerging Markets (GEM) Funds. Investors spared commodities and materials rich EMEA Equity Funds and Latin America Equity Funds, which saw only modest outflows.
Year-to-date investors have removed more than $11bn from Asia ex-Japan Equity Funds, with some $5bn of that total pulled out of China and Greater China Funds. But Taiwan Country Funds posted their eighth straight week of inflows as investors continue to bet that the March 22 presidential election will cement opposition control, thereby setting the stage for a thaw in relations with China.
EMEA Equity Funds were once again buffered by investors’ appetite for exposure to commodity-rich markets throughout the region, although that was not enough to offset the $202m pulled out of Emerging Europe Equity Funds as the Eurozone’s outlook continues to cool.
Russia Equity Funds posted their eighth straight week of net inflows and Middle East and Africa Regional, Middle East Regional, South Africa, and Saudi Arabia Equity Funds all took in new money.
Flows into sector funds during the third week of March were led by Financial Sector Funds, which took in $1.87bn on the heels of the previous week’s $2.65bn inflow. Once again, however, those flows were driven by ETFs. Year-to-date Financial Sector Funds have absorbed more than $6bn, but minus ETF’s that drops to an outflow of $294m. Commodity Sector Funds absorbed $516m for the week and the defensive Consumer Goods Sector Funds a net $390m.
The cuts in short-term interest rates did little for Real Estate Sector Funds, which were hit with net redemptions totalling $353m.
Fears the rate cuts will translate into higher inflation have pushed 30-year prime residential mortgage rates in the US – which are linked to long-term Treasuries – higher during the first quarter of 2008.
Utilities, energy, healthcare, biotechnology, telecoms and technology sector funds also posted outflows for the week.
Money Market and Balanced Funds were the only major EPFR Global-tracked fixed income fund groups to post inflows during the third week of March, although two key sub-groups – US Municipal Bond and Emerging Markets Local Currency Funds – also took in fresh money. Global and high yield bond funds, meanwhile, recorded outflows of $413m and $273m respectively.
Overall, US bond funds had net outflows of $216m for the week. But US Municipal Bond Funds took in a net $218m as many of the better borrowers issue new, fixed-rate debt to replace existing variable rate issues.
A better pipeline of new issues is also among the factors that have tilted flows into emerging markets bond funds towards those focused on local currency-denominated issues. The $8.8bn absorbed by money market funds took year-to-date inflows over $123bn.
Global funds post major inflows this week