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Emerging Market Funds hit by investors pull back

According to EPFR Global, a fund flow data provider, almost $6bn was pulled out of emerging market funds in the five days to Wednesday (2011-09-28).  Emerging market funds have suffered the worst run of redemptions since at least 2004 over the past week. Equity funds have seen strong outflows for some time, but fixed income funds are now also experiencing substantial withdrawals.

Fixed income redemptions were $3.2bn, or 62 per cent higher than the previous record week of outflows in October 2008, following the collapse of Lehman Brothers, when $2bn was withdrawn.

The MSCI Emerging Markets index of shares has dropped for five consecutive months, but sovereign and corporate bonds – both denominated in local and “hard” international currencies – had proved more resilient until recently.

Local currency bond funds, where the debt is exposed to both foreign exchange rate and interest rate, have also been badly hit by redemptions. After posting 25 straight weeks of inflows, investors have withdrawn money for the past two weeks, and almost $1.7bn in the past week.

All 25 of the largest emerging market currencies dipped against the US dollar in September, many by double digits.  For instance, the Brazilian real has shed 14.3 per cent against the dollar, the South African rand 13.1 per cent and the Russian rouble 10.6 per cent.

The marked shift towards a “risk-off” investor strategy was also reflected in $5.4bn outflows from developed market equity funds and $1.1bn withdrawals from high yield bond flows.  Meanwhile, safer asset classes such as developed market bond funds and money market funds saw inflows of $7.5bn and $8.9bn respectively, according to EPFR.

Reference:  Financial Times, 20110930, "Investors Pull Back from Emerging Market Funds".