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February 26, 2014

In the event of Emergency – run to the Frontiers

by Lipper Alpha Insight.

The January edition of Lipper’s Global FundFlows report has been produced.

It was simply not the desired start to the New Year the global mutual funds industry had wanted. Global assets under management (AUM) fell sharply for the first time in six months, rocked by emerging-market turbulence, which led to poor equity performance for many funds. Despite this fall in asset valuations, mutual fund sales were not significantly impacted as investors continued to buy; funds recorded net inflows for January to the tune of US$126.5 billion.

Equity funds, mixed-asset funds, and alternatives funds continued their positive sales trend of the last six months, but this time bond funds joined the party with US$8.9 billion of net inflows. The latter figure started to reverse the trend of significant bond fund net outflows witnessed in the back half of 2013. Does this mark the beginning of green shoots for bond fund sales in early 2014?

Table 1. Global Mutual Fund Estimated Net Flows and AUM (US$Bil)

AUM

 

 

 

 

 

 

Source: Lipper

Lipper Global Classifications
The leading sellers for January were developed equity funds focused on global, U.S., and European strategies. Money market GBP and EUR both attracted significant capital. Emerging-market bond funds continued to see net outflows.

Figure 1. Estimated Net Flows for Lipper Global Classifications, January 2014

 

ENF LGC January

 

 

 

 

 

Source: Lipper

None of this bucked the trend of recent months, but we saw some interesting changes in asset performance. Since fund sales are said to lag performance data, it is worth a look to see what might be around the corner.

Funds in equity sector gold and precious metals recorded some remarkable “bouncebackability.” After last year’s drop of circa 30% we observed a positive Lipper-sector-leading January performance of 8.4%. We could start to see more and more interest in this sector, if there is a perception of any overheating in the equity markets. Is this a sign that some equity investors have already taken profits and are looking for a safe haven?

The equity frontier markets of UAE, Egypt, and Vietnam all made solid gains, while some emerging-market economies plummeted to alarming depths. Russia, Turkey, Argentina, and Chile all experienced currency tail shock beyond 10% for the month! The biotechnology sector was worth a mention on its own because growth there accelerated. In the period from June 2011 to January 2014 this sector performed equivalent to an annualized rate of 23%. It recorded steady net inflows of US$0.38 billion again this past month.

Figure 2. Five Top and Bottom Lipper Global Classification Performers, January 2014

 

Returns

 

 

 

 

 

 

Source: Lipper

Emerging Frontiers

Evidence of currency weakness and greenback dependency in emerging markets was supported in this latest dollar-denominated report. The figures pointed to a possible hedge or diversification opportunity: frontier markets are not the same beast as emerging markets. Free-floating emerging currencies suffered investment outflows to currency safety in January. The results from the report inspired us to dig a little deeper using the Lipper for Investment Management desktop and a three-year risk/reward scatter chart. Emerging markets are depicted as red spheres, whereas frontier markets are depicted as blue triangles.

Two observations are noteworthy here:

  • The risk/reward profile of most emerging–market fund classifications over the period is fairly similar (clustered), whereas that of each individual frontier market classification is unique and widely differing.
  • Most frontier market classifications had lower standard deviations in this period than did their emerging market counterparts, particularly those that have currencies pegged to the dollar.
Figure 3. Scatterplot of Lipper Emerging Market Classifications’ Versus Frontier Market Classifications’ Risk/Reward Profiles, June 2011-January 2014

 

Scatter

 

 

 

 

 

Source: Lipper

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