Global Investing

US investors prop up emerging equity flows

U.S. mutual fund investors are ploughing on with bets on emerging market equities, according to the latest net flows numbers from our corporate cousins at fund research firm Lipper. Has no one told them there’s supposed to be a massive sell-off?

August was the 30th straight month the sector has seen net inflows, and the 9th straight month of net inflows above $1 billion. Sure, there’s a downward trend from the February peak, but the resilience of demand is notable given doom-laden headlines about how EM markets will fare once the Fed feels its generosity is no longer required.

Of course, the popular image of mutual fund investors is as a perennial lagging indicator for allocations trends, and the stage may be being set for a sharp turnaround this month. However, U.S. investors have already been offloading their bets on emerging debt, with funds in the sector seeing net outflows of $2.6 billion, or 7.5% of total assets, in the three months to end-August.

It may be that this is part of a trend towards international diversification in the U.S., with investors taking a longer view and a more sanguine approach to risk. But they’ll need strong stomachs. Three-month performance at those U.S.-domiciled EM equity funds is at -7.7% (see chart below), while three-month net inflows are at more than $4.5 billion. Juxtapose that with the global EM equity sector over the same period, where  average fund performance is at -8.2% and net outflows are a chunky $7.8 billion. In short, investors elsewhere are pulling cash out of emerging equity funds but U.S. fund buyers seem to be going the other way.

Chad Cleaver and Howard Schwab, emerging markets fund managers at U.S. fund firm Driehaus Capital, reckon the data simply reflects  some clear incentives for American investors to stick with EM. They told us:

After disappointing start to 2013, how will hedge funds catch up?

Despite the early-year rally in equity markets, some hedge funds seem to have had a disappointing start… yet again.

JP Morgan notes that the industry’s benchmark HFRI index was up 2.8% by end-February,  well below the 4.6% for MSCI All-Country index.

Some 4.2 percent of hedge funds suffered losses of at least 5% in the first two months of year, compared with 3.3% in the same period in 2012. Still, this is better than 2008/2009, when losses of this magnitude were seen at more than one in five of hedge funds. According to JP Morgan:

Three snapshots for Thursday

Fears that Athens is on the brink of crashing out of the euro zone and igniting a renewed financial crisis have rattled global markets and alarmed world leaders, with Greece set to figure high on the agenda at a G8 summit later this week. This chart shows the impact on assets since the Greek election:

Euro zone banks now account for only 8% of total euro zone market value – they were over over 20% of the market in 2007:

Japan’s economy rebounded in January-March from a lull in the previous quarter, shaking off the pain of a strong yen and Europe’s debt crisis on solid consumer spending and rebuilding from last year’s earthquake.

Three snapshots for Wednesday

This chart shows the wide dispersion in equity market performance so far this year. In local currency terms Korea has a total return of nearly 12% and Germany over 10%, this compares to Italy at-6% and Spain at -16%.

In contrast to last year, this has driven average correlations between equity markets lower.

However, correlations may well pick up if markets move back into ‘risk-off’ mode. The chart below showing the weakness in the Citigroup G10 economic surprise indicator seems to be pointing towards further weakness in bonds relative to equities.

Three snapshots for Tuesday

A good sign for UK growth – activity in Britain’s construction sector unexpectedly accelerated in March, the Markit/CIPS  Purchasing Managers’ Index rising to 56.7 from February’s 54.3.

An update on cross-asset performance this year as we head into the 2nd quarter:

Equity risk premium by region:

 

Hedge funds still lagging behind

How are hedgies performing this year?

The latest performance data from Nice-based business school EDHEC-Risk Institute shows various hedge funds strategies returned on average 1.46% in January, far behind the S&P 500 index which gained almost 4.5%. Hedge Fund Strategies Jan 2012 YTD* Annual Average Return since January 2001 Annual Std Dev since January 2001 Sharpe Ratio Convertible Arbitrage 2.22% 2.2% 6.5% 7.3% 0.34 CTA Global 0.49% 0.5% 6.6% 8.6% 0.30 Distressed Securities 3.28% 3.3% 10.3% 6.3% 1.00 Emerging Markets 4.55% 4.5% 10.5% 10.7% 0.61 Equity Market Neutral 1.01% 1.0% 4.5% 3.0% 0.16 Event Driven 2.95% 2.9% 7.8% 6.1% 0.62 Fixed Income Arbitrage 1.33% 1.3% 6.0% 4.4% 0.46 Global Macro 2.05% 2.1% 7.0% 4.5% 0.68 Long/Short Equity 3.36% 3.4% 5.3% 7.3% 0.17 Merger Arbitrage 1.03% 1.0% 5.4% 3.3% 0.43 Relative Value 1.95% 1.9% 6.4% 4.8% 0.51 Short Selling -6.85% -6.9% 0.3% 14.1% -0.26 Funds of Funds 1.65% 1.7% 3.6% 5.1% -0.07

 

Emerging markets strategy was the best performing, with gains of 4.55%. Interestingly, this is less than half of how the benchmark MSCI EM index performed (up more than 11 percent in the same period).

Retail threat to euro zone bond markets

Because of the peripheral euro zone bond implosion, many European bond market funds have suffered losses this year. JP Morgan says a major risk to European bond markets stems from liquidations by retail investors (aka Mrs Watanabe from Europe).

“Retail investors who bought bond funds as a savings vehicle are now experiencing capital losses on their holdings… Retail investors’ fund flows tend to be a function of past performance,” the bank says.

According to year-to-date performance of 556 bond funds that invest in Western European bonds, as many as a third have negative returns. The 7 funds with worse than -20% YTD performance have high exposure to Greek bonds (no doubt).

The Naked Truth

Do independent asset managers perform better than bank-run funds?

Lipper was recently approached to analyse the difference in performance between funds operated by broader financial services companies (banks and insurers) and those managed by ‘pure play’ asset managers.

This research came in the wake of comments made by Peter Hargreaves, founder of IFA Hargreaves Lansdown, who said in September that many funds in the UK run by banks were “seriously crap”.

With the temperature apparently rising, it might be a little foolhardy to enter such a debate. Yet objective analysis is surely where independent fund researchers can best provide a useful contribution. Besides, it might be gettin’ hot in here, but I for one will not be takin’ off my clothes.

from MacroScope:

SWFs and ethical investing: serving multitude of objectives

Sovereign wealth funds, eager to be accepted in the West, are increasingly interested in showing the world that they care about environment and governance by investing in socially responsible firms.

It all sounds good, but the biggest shortfall of Socially Responsible Investing (SRI) is that it lacks convincing performance details. Therefore, SRI or ethical investing for SWFs is not just about returns: It allows them to combine a multitude of objectives, such as portfolio diversification, enhancing transparency, meeting social goals and gaining acceptance even among critics who suspect they operate politically.

SRI, already a $2.71 trillion industry in the US, involves buying shares in companies that manage environmental, social and governance risks. For example, firms which make clean technologies are in, while businesses that pollute the environment, abuse human rights or produce nuclear arms are out.

Stocks and the City

The amorous intentions of the British are intimately connected to the performance of the stockmarket, extra-marital dating website illicitencounters.co.uk says.

It notes that although the website has been running since 2004, by far the biggest jump in membership has been in the past 12 months, when it leapt to 310,000 from 180,000 in the previous fiscal year.

“We’re not financial analysts here, but we have noticed a sharp increase in the number of new profiles posted – each time the FTSE moves dramatically, up or down,” says Sarah Hartley, spokesperson for the site.

The site previously reported a surge in membership in the aftermath of the collapse of Lehman Brothers last September, “suggesting the credit crunch had made way for the ‘lingering lunch’”.