Another week of strong flows into Global Equity Funds enabled EPFR Developed Markets Equity Funds to extend their longest inflow streak since the first quarter. Lower than expected inflation rates in both the US and Eurozone changed the nature of the debate over when, and to what degree, the U.S. Federal Reserve and European Central Bank will tighten their respective monetary policies.
The ECB met the day after the latest weekly reporting period ended, keeping its existing interest rates and asset purchases unchanged and acknowledging that inflation remains well short of its 2 percent target. That suggests to investors that the Eurozone’s central bank will err on the side of caution when it starts to wind down its current quantitative easing program. Commitments to Europe Equity Funds hit a 10-week high, with retail flows continuing their rebound after bottoming out earlier this month, and most of the inflows went to Europe and Europe ex-UK Regional Funds.
Soft inflation numbers also prompted U.S. investors to discount the Fed’s hitherto hawkish remarks about raising interest rates and trimming its balance sheet. That helped propel benchmark equities indexes to fresh record highs. But it was not enough to stop U.S. Equity Funds extending their longest outflow streak in over a year, as redemptions from actively managed funds exceeded modest inflows to U.S. Equity ETFs. Overall Small Cap Blend Funds posted the biggest outflow in both cash and flows as a percentage of AUM terms and Large Cap Growth Funds the largest inflows.
David Ader, Informa Financial Intelligence’s Chief Macro Strategist, believes that the Federal Reserve will be more cautious that previously feared because of the uncertainty surrounding the degree to which current asset prices depend on central bank largesse.
In a recent note, Ader observed that “the obvious risk [to interest rate and balance sheet normalization] is that as the market absorbs more of what the Fed and other central banks don’t buy, rates need to accommodate the supply…and if rates do rise, does that stem the buybacks that have supported equities and enhanced P/E ratios? The chart below raises the cautionary note that when balance sheets go the other way there is risk, which is why I think the Fed and others will proceed with more caution than even their gradual demeanor has opined.”
Flows to Japan Equity Funds bounced back from the previous week’s outflows as yen-denominated commitments offset further foreign currency redemptions. The recent announcement by the giant Government Pension Investment Fund that it will allocate 1 trillion yen to the stocks included in three ESG (environmental, social, and governance) indexes did not move the needle for Japan Equity Funds with ESG or SRI mandates: redemptions from those funds hit a six week high.
Global Equity Funds, the largest of the diversified Developed Markets Equity Fund groups, maintained their record of posting inflows every week so far this year. Both Global ex-US Funds and those with fully global mandates absorbed over $2 billion.