Financial sector funds swim against the outgoing tide in late August

August 29, 2008
Funds saw plenty of redemption activity during the fourth week of August. But investors were in no hurry to reallocate the money they pulled out. Of the 24 major equity, sector and fixed income fund groups tracked by EPFR Global, 17 posted outflows totaling $7.6 billion while only three of the seven that absorbed fresh money took in over $150 million. Emerging markets equity funds posted outflows for the 11th time in the past 12 weeks, US Equity Funds saw their four-week winning streak snapped and redemptions from Europe Equity Funds hit an eight week high.

One fund group, Financial Sector Funds, accounted for nearly 60% of the inflows posted by the seven fund groups that did attract new money. The other six were Consumer Goods, Real Estate, Utilities and Healthcare/Biotechnology Sector Funds and US and High Yield Bond Funds. Meanwhile flows in an out of Money Markets Funds, which have served as the sidelines for most of year, were essentially neutral for the second week running.
At the country and sub-regional level Middle East and Africa Funds and China Equity Funds resumed their winning runs while Russia and Brazil Equity Funds extended their losing streaks to nine and 12 weeks respectively.

US, Global, Europe and Japan Equity Fund Flows
Some better than expected US capital expenditure, 2Q GDP and durable goods data did not translate into positive flows for US Equity Funds or those funds geared to markets that depend heavily on their ability to export to the world's largest economy. Investors pulled $2.52 billion out of US Equity Funds, $1.23 billion out of Europe Equity Funds and $128 million from Japan Equity Funds during the week ending August 27.

In the case of Japan, the optimism that rising prices would chase domestic savings into Japanese equity markets has given way to pessimism about the risk of stagflation. Economic growth during the second quarter was negative while wholesale and headline inflation rates have climbed to 27 and 10 year highs respectively. In addition, a stimulus package being mooted by Japan's government is being interpreted by many foreign investors as an unwelcome return to pre-reform retail politics. Japan Equity Funds have now posted outflows for five straight weeks.
Growth in the 15-member Eurozone is also slowing sharply as tighter credit squeezes domestic demand. Inflationary pressures, meanwhile, have prompted hawkish rhetoric from the European Central Bank. Redemptions from Europe Equity Funds in late August accelerated to levels last seen in early July and year-to-date outflows are now within striking distance of $45 billion versus $50 billion for the much larger group of US Equity Funds.

The US Equity Funds experienced outflows for the first time in five weeks as modest flows into Mid Cap Funds were more than canceled out by redemptions from Large Cap Blend ETFs. The pendulum swung away from growth stocks during this week, with Value oriented funds outperforming their Growth peers in both flow and performance terms across all capitalizations.
The two diversified fund group geared primarily to developed markets, Global and Pacific Equity Funds, recorded their third straight week of outflows respectively. The $835 million removed from Global Equity Funds pushed year-to-date outflows from last year's most successful fund group in terms of attracting new money to nearly $8 billion.

Emerging Market Equity Fund Flows
All four of the major emerging market fund groups recorded outflows during the fourth week of August with EMEA Equity Funds hit the hardest in percentage terms. Investors pulled money out of the diversified Global Emerging Markets (GEM) Equity Funds for a fifth straight week and extended Latin America Equity Funds' losing run to 12 weeks and $4.1 billion. Since the second week of June EPFR Global-tracked emerging market funds have surrendered a net $23.1 billion.
Appetite for exposure to emerging markets has been eroded by a sharp correction in commodity prices during 3Q08, a string of downward revisions to economic growth forecasts and painfully high inflation rates in several key markets including Russia, India, South Africa and Argentina. Investors still have appetite for direct exposure to China, although the $175 million they committed to China Equity Funds was more than offset by redemptions from Asia ex-Japan Equity Funds, Greater China Equity Funds, India Equity Funds and Taiwan Equity Funds.
EMEA Equity Funds remain the only major emerging markets fund group to post inflows year-to-date, but the $2.9 billion they had absorbed by the end of 1H08 has dwindled to under $230 million going into September. The abrupt loss of enthusiasm for Russia, fueled by state pressure on firms in "strategic" sectors and the recent incursion into Georgia, has played a role with outflows from Russia Equity Funds since late June exceeding $800 million. And since late June investors have pulled nearly $4 billion out of the Emerging Europe Equity Funds, which currently maintain a 42% weighting to Russian equities.

Sector Funds
Once again it was Financial Sector Funds that caught the eye. Following two weeks of strong outflows totaling $2.3 billion these funds absorbed a net $813 million during the fourth week of August as faith in the US government's willingness top rescue mortgage giants Freddie Mac and Fannie Mae, allied to better news about house prices and sales, rekindled optimism that the worst is over for this sector. Real Estate Sector Funds also benefited from this shift in sentiment, absorbing a net $175 million for the week, and flows into Consumer Goods Sector Funds hit a 12 week high.
Also among the winners were Healthcare/Biotechnology Sector Funds, which extended their winning streak to seven weeks and $2.3 billion, and Utilities Sector Funds. Investors removed money from Energy Sector Funds for a fifth straight week despite their improved performance ahead of the Northern Hemisphere's heating season, pulled another $114 million out of Commodities Sector Funds and snapped Technology Sector Funds' five week inflow streak.