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FUND FLOWS: Investors Turn to European Equity Funds

As benchmarks reach new highs, equity fund investors continue to pull money out of the U.S. in favor of Europe.

The EPFR-tracked Developed Markets Equity Funds recorded their sixth straight week of inflows during early November despite further outflows from US Equity Funds. Flows into Europe Equity Funds climbed to a 15-week high; Japan Equity Funds took in over $1 billion for the second week in a row and year-to-date commitments to Global Equity Funds climbed past the $145 billion mark.

Investors looking to Europe continue to buy into the region’s broad recovery story but limit their exposure to individual markets. Flows into Europe ex-UK Regional Equity Funds accounted for over 70 percent of the headline number for all Europe Equity Funds. Investors still see value in a Spanish market that sold off aggressively in the wake of Catalonia’s vote for independence but the fractious—and so far inconclusive—negotiations between the European Union and the United Kingdom over the terms of the latter’s exit are weighing on UK Equity Funds, which have now posted outflows for nine straight weeks.

Both retail and institutional investors pulled money from US Equity Funds as benchmark indexes rode a strong corporate earnings season and on-off hopes for tax reform to fresh record highs. According to Informa Financial Intelligence’s chief macro strategist, David Ader, the latest outflows probably reflect simple rebalancing activity. “The S&P 500 has returned 16 percent so far this year. The Bloomberg Barclays Aggregate Bond Index has returned 3.5 percent (see chart below). So here we are in November and perhaps asset rebalancing is going on—it’s certainly anticipated—and that would favor bonds vs. stocks in a balanced portfolio,” wrote Ader in a recent note. “Has anyone suggested stocks look frothy? For public pensions funds especially, a shift to long bonds and locking in equity gains makes sense and is something we’ve seen before.”

Foreign currency-denominated flows to Japan Equity Funds were positive for the sixth straight week in early November as the country’s benchmark equities index climbed to 22-year highs and Prime Minister Shinzo Abe’s administration outlined its economic goals in the wake of its recent election victory. Boosting wages, supporting younger entrants to the workforce and expanding access to pre-schools are among those goals.

Cameron Brandt is Director of Research for EPFR Global, an Informa Financial Intelligence company.

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