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FUND FLOWS: Sector Funds Suggest Investors Are Weary of the Fed’s Patience

In a perfect world, the Fed would wait for inflation to hit 2 percent. It could raise the interest rate before then.

Flows to EPFR-tracked Sector Fund groups in late July suggested that some investors remain skeptical about the U.S. Federal Reserve’s willingness to wait for inflation to move closer to its 2 percent target before pushing ahead with further interest rate hikes. Gold, Utilities and Real Estate Funds all experienced outflows during the seven days ending July 26, while Financial Sector Funds attracted over $1 billion for the fourth week in a row.

In addition to the increased pricing power that higher interest rates should bring, investors committing money to Financial Sector Funds are also responding to the latest round of share buybacks announced by major U.S. banks late in the second quarter. Despite predictions of a tough second-quarter earnings season for European banks, which continue to wrestle with new regulatory requirements and a significant number of bad loans, flows to Europe Regional Financial Sector Funds hit their highest level since late 2013, with five funds absorbing over $30 million.

Investors hoping that the electoral imperatives for U.S. lawmakers would save the infrastructure portions of U.S. President Donald Trump’s generally stalled agenda appeared to capitulate in late July. Outflows from Infrastructure Sector Funds hit their highest level since the first week of the year.

Outflows from Real Estate Sector Funds climbed to a seven-week high ahead of the U.S. Federal Reserve’s latest policy meeting, which ended with the Fed signaling that it will start reducing its holdings of mortgage-backed securities “relatively soon.”

Cameron Brandt is director of research for EPFR Global, an Informa Financial Intelligence company.

TAGS: Mutual Funds
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