With hopes for U.S. President Trump reflationary agenda fading as his political problems mount, developed markets investors continued to pull money out of U.S. Equity Funds and steer more cash into Europe and Global ex-U.S. Equity Funds.
The week ending May 17 saw redemptions from U.S. Equity Funds hit their third highest total year-to-date, with Large Cap Funds experiencing the biggest redemptions in cash terms and Mid-Cap Funds in flows as a percent of AUM terms. Among the actively managed fund groups only Small-Cap Blend Funds ended the week with net inflows. So far this year, actively managed U.S. Equity Funds have collectively outperformed U.S. ETFs by less than 40 basis points, with the margin biggest for Small Cap Funds — 4.03 percent vs 2.57 percent — and smallest for funds with large-cap mandates.
Fears that the U.S. economy will not hit the heights forecast for it, and the search by some investors for safer developed market havens, saw the Japanese yen strengthen versus the U.S. dollar. With flows to Japan Equity Funds strongly correlated to the competitiveness of the yen for Japanese exporters, redemptions from this fund group exceeded $1.5 billion for the second straight week.
Europe Equity Funds continue to benefit from investor relief that centrist Emmanuel Macron, and not populist Marine Le Pen, emerged victorious from France’s recent presidential election. However, while investors again bought into Europe’s overall recovery story, and the perceived ebbing of populism by way of diversified regional funds, they took profits at the country level with Germany, France, Spain, Switzerland, Italy and U.K. Equity Funds all recording net outflows for the week.
Despite the recent flows to Europe Equity Funds, EPFR’s Global 8 Model (see chart below), which assigns overweights and underweights by region based on the scoring of flows into relevant equity fund groups, suggests that rotating exposure from the U.S. to emerging markets still offers better returns than jumping on the European bandwagon.
Global Equity Funds, the largest of the diversified Developed Markets Equity Fund groups, added over $3 billion to a 2017 total that has now moved north of $50 billion. The biggest annual inflow for this fund group was the $128 billion it took in during 2015.