Fund flows suggest investors are refraining from making any big decisions until they receive a clearer picture on quantitative easing in the US. Cherry Reynard reports.
Fund flows were erratic in November as investors were pulled in different directions by the mixed messages emerging from the Federal Reserve. Those who believed incoming chairman Janet Yellen would hold off on the tapering of quantitative easing (QE) returned to emerging markets, while those who remained convinced the end of QE is inevitable steered clear of equities and longer duration bonds altogether.
At the start of November, investors exited US equities, possibly as a result of profit-taking, possibly as a result of policy meetings worldwide that threatened to increase economic uncertainty.
EPFR Global data showed $7bn was pulled out of US equity funds during the first week of the month, with small-caps particularly hard hit. US high yield bonds and tech stocks also suffered.
Where did the smart money go in November?
Later in the month, investors hedged their bets as Yellen said the benefits of the current QE programme still outweighed the costs, while minutes from the Fed’s October meeting gave the opposing message, suggesting the decision to taper could be made in the next few months.
Yellen’s relative support for QE halted flows out of emerging market and US funds but, clearly, there were still those betting on an end to QE: emerging market bonds and gold funds saw outflows of over $1bn. Both equity and bond funds attracted inflows in the third week of November, but while equity funds took in a net $6bn, bond funds secured just $2.8bn.
At a country level, investors continued to favour European equities; however, lack of reform progress in Japan meant equity funds there posted their biggest weekly outflow in over two years.
According to BlackRock, global ETP flows were $15.8bn during November and investors were increasingly betting on tapering. Developed markets-focused ETPs took $21.5bn, while emerging markets experienced outflows of $4.7bn. Within these totals, pan-European equities maintained momentum, gathering $1.5bn, while US equities attracted $9.9bn. Small-caps, however, were hardest hit by redemptions. Fixed income ETP flows reached just $0.9bn in November and continued to be split sharply by duration.
European investors bought heavily into equities in the absence of Fed tapering. Equity funds saw the highest level of inflows since January this year, according to Morningstar. Alternative and allocation funds also saw positive inflows. Commodity and bond funds, on the other hand, suffered outflows of €419m and €988m respectively.
The stand-out area was European Large-Cap Blend Equity, which saw inflows of €2.4bn, the highest on record since Morningstar began collecting data on this area in 2007. US dollar high yield funds also remained in demand, as did global emerging market equity funds, which benefited from the absence of tapering, reporting their first positive inflows since May.
In general, defensive areas were out of fashion. Guaranteed funds were hardest hit but more defensive government and corporate bond funds were also out of favour. Asia Pacific and UK Equity Income were the only equity sectors to see outflows.
The outflows from UK equity income were mirrored in the UK and had one common cause: an exodus from Neil Woodford’s Invesco Perpetual funds following the news of his departure. The IMA statistics showed net retail outflows of £298m from the sector in October.
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