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Despite Concerns, Investors Take A Risk-On Approach To Fund Investing

By Tom Roseen Banking on the recent three-week rally in equities, supported by better-than-expected first-time jobless benefit claims, a jump in home builder confidence in October, hopes that Beijing would continue to provide more stimuli to the Chinese economy, and housing starts being near eight-year highs, investors took a risk-on approach to fund investing during the fund-flows week ended October 21, 2015, injecting a net $6.3 billion into conventional funds and exchange-traded funds (ETFs). Investors turned their back on money market funds, redeeming $2.6 billion for the week, but they were net purchasers of the other three fund macro-groups, injecting some $4.4 billion into taxable bond funds, $4.3 billion into equity funds, and $0.2 billion into municipal bond funds for the week. For the third consecutive week taxable bond funds (including conventional funds and ETFs) witnessed net inflows of a little less than $4.4 billion, their largest weekly inflows since the week ended May 20, 2015. As fund investors became more risk seeking, they padded the coffers of corporate high-yield debt funds, which attracted the largest amount of net new money for the week of the major fixed income groups, taking in $3.3 billion (their second largest weekly net inflows on record and the largest since October 26, 2011). (click to enlarge) Source: Thomson Reuters Interestingly, the risk-on mentality was not equally applied to the equity side of the business. While authorized participants (APs) injected $4.5 billion into equity ETFs for the week, conventional fund investors were net redeemers of equity funds, withdrawing $0.2 billion from the group. Despite continued concerns about the Q3 earnings season and in anticipation that the Federal Reserve may delay raising interest rates until 2016, APs were net purchasers of domestic equity ETFs (+$3.2 billion), injecting money into the group for a second consecutive week. They also padded the coffers of nondomestic equity ETFs (to the tune of +$1.3 billion) for the sixth week running. In contrast, on the conventional funds side of the business, domestic equity funds-handing back $0.8 billion-witnessed their fourth consecutive week of net outflows. Meanwhile, their nondomestic equity fund counterparts witnessed $646 million of net inflows-attracting money for the first week in four.

China Funds And Black Monday

By Jake Moeller Lipper’s Jake Moeller examines the performance of China-themed funds during Black Monday week. Most investors will have been familiar with the compelling thematic stories about China for many years: population, infrastructure growth, urbanization, etc. Until 2011 all the China funds available in the market were equity funds. Today, there are nearly 100 UCITs funds (and considerably more share classes) with a China focus available in Europe. They cover not only equities; funds can be found specializing in emerging-market bond, mixed-asset, currency, and money market sector classifications. If we accept that mutual fund production reflects investor sentiment, we can illustrate the successful pervasion of the China story. In 2015 up to June we have seen 13 new major China fund launches in Europe (it will be interesting to see how many funds are launched in the second half of the year!). Indeed, nearly 50% of all the China-themed UCITs vehicles have been launched since 2010, with total assets under management for all of these funds increasing from €19 billion in 2010 to some €28 billion today-an increase of 47%. But as a whole, these figures represent a very small proportion of the overall UCITs market. (click to enlarge) Source: Lipper for Investment Management The variation of returns among China-themed funds during the Black Monday event was considerable and almost exclusively negative-only two funds returned a positive figure for the seven-day period ending 27 August 2015 ( Prescient China Conservative E [Hedged] USD , up 1.62%, and Amundi Eureka Cina 2015 , up 0.29%). Casualties at the other end saw losses over the same period of up to 18.2%. Some big name losers over the period included AllianzGI’s China A-Shares , which fell 13.8%; BNP Paribas Investment Partners’ Flexi I CSI 300 Index , which returned minus 15.5%; and KBC Horizon China , returning minus 17.3%. The overall average return during this seven-day period was minus 5%. It is an unusual practice and possibly unwise to spend too much time examining such short-term performance-especially in collective investment vehicles, but the overall volatility of some of these examples was breathtaking in isolation. Let’s not forget, though, that over that same short period the Investment Association U.K. All Companies sector, for example, also returned minus 5%-a figure comparable to the average return of the China fund. Similarly, the IA North America Sector returned -5.6% over the same period. Consider also some longer-term performance. Taking the one-year period to 27 August, there were some fairly impressive returns even with the Black Monday correction. KBC Horizon China , so maligned in our seven-day analysis, returned 57% over this period; Allianz China A-Shares (USD) , 69%; and the average of all the funds was a fairly robust 10%.

Volatile Trading Week Produces Somewhat Muted U.S. Fund Flows

For the fund-flows week ended Wednesday, September 2 the U.S. equity markets experienced a roller coaster ride. The Dow Jones Industrial Average experienced four triple digit move days (two up and two down) to close the week with a gain of 0.4%. This volatility was spurred on by the continued fears about the economic slow-down in China (the down days) counter balanced by strong U.S. economic data (sharply revised upwards second quarter GDP numbers) and a bounce in oil prices. Underscoring the increased volatility in the market was the increase in the CBOE Volatility Index (VIX) which spiked at greater than 30. Any value above 20 for the VIX is a warning sign to investors that the market is ripe for wide shifts in momentum. This week’s fund flow results did not reflect the up and down nature of the trading as most of the data produced was a continuation of current trends. Breaking down this week’s fund flows information by macro groups (equity funds, taxable bond funds, municipal bonds and money market funds) and by fund type (mutual funds and ETFs) we saw that all of the mutual funds groups experienced net outflows. Taxable bond mutual funds (-$4.3 billion) suffered through their sixth straight week of negative flows. Within the taxable bond fund group investors took money out of Lipper’s High Yield Funds (-$714 million) and Loan Participation Funds (-$451 million) in what can be viewed as fight to safety in this time of uncertainty. Municipal bond mutual funds and equity mutual funds also extended their recent losing streaks with their second and third consecutive weeks of net outflows, respectively. Contradicting the other groups, money market funds did reverse their current trend with outflows of over $10 billion after four consecutive weeks of net inflows which totaled almost $50 billion. There was some positive news within the ETF universe as equity ETFs (+$4.8 billion) and taxable bond ETFs (+$4.3 billion) both were the beneficiaries of sizeable net inflows. For equity ETFs it was third net inflow in four weeks as SPDR S&P 500 ETF Trust (NYSEARCA: SPY ) paced the field by taking in $7.2 billion of net new money. The inflows into taxable bond ETFs marked their third consecutive week of positive results with almost $7.3 billion net inflows during the time period. (click to enlarge) Share this article with a colleague