May 22, 2020

Emerging Markets Funds Still Feeling the Impact of the COVID-19 Pandemic

by Pat Keon, CFA.

Funds in Refinitiv Lipper’s Emerging Markets equity peer group (including both mutual funds and ETFs) suffered net negative flows of $950 million for the fund-flows week ended Wednesday, May 20. While we have seen some stabilization of fund-flows activity over the last several weeks as taxable bond funds, municipal debt funds, and even some sectors of the equity fund universe (healthcare and technology) have experienced net positive flows, it has not extended to the emerging markets equity funds group. Emerging markets funds have seen net money leave for 13 straight weeks (a record for the group) for total net outflows during this time period of $17.8 billion. The prior longest run of net outflows for the group occurred during the third quarter of 2019 when $9.8 billion left over nine weeks.

To put into perspective what the economic fallout from the coronavirus has done to this sector, emerging markets equity funds have suffered only three annual net outflows in their history (dating back to 1992 when Lipper began tracking flows data), with the worst being a $4.0 billion net negative flow in 2015. The current year-to-date net outflows for the group stands at $14.7 billion. Emerging markets stocks are risky assets and it is a basic tenet of investing that investors tend to shy away from or divest riskier assets in times of economic uncertainty. With a global economic shutdown and rampant unemployment due to COVID-19, things don’t get more uncertain than right now. As global trade has slowed to a halt, developing nations that rely on exporting natural resources (such as oil) feel the pain while other countries that depend on tourism dollars to fuel their economy are hampered by travel restrictions and fears.

Emerging markets ETFs are responsible for the majority (-$10.6 billion) of the group’s net outflows this year, while emerging markets mutual funds have also seen $4.1 billion leave. On the ETF side of the ledger, the largest individual net outflows belong to iShares Core MSCI Emerging Markets ETF (IEMG, -$4.9 billion) and iShares MSCI Emerging Markets ETF (EEM, -$4.7 billion). IEMG and EEM are the two largest ETF products in the group with assets under management of $46.5 billion and $20.3 billion, respectively. The largest net outflows among emerging markets mutual funds appears to belong to Invesco Oppenheimer Developing Markets Fund (-$2.0 billion) and DFA Emerging Markets Core Equity Portfolio (-$1.9 billion).

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