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Generic is the trend for EM equity funds

Emerging market equities have seen strong outflows over the past three and five year-periods. But all of these redemptions can be attributed to regional EM funds.


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Moreover, global emerging market equity funds have seen €35.5bn in net inflows over the past five years, compared to net outflows of €26.7bn for the EM equity universe as a whole during that period, an analysis of Morningstar fund flows data shows.

In fact, all major single country and regional EM equity categories, from Indian equities to Latin American equities, have seen net outflows over the previous five-year period. Chinese equities, in fact, account for the bulk of them: a net €10.9bn was taken out of mainland A-shares, and other equity funds with a focus on China saw net outflows of similar magnitude.

Asia flows: failing to gain traction

Despite Asia being the economic engine of emerging markets, and even though the bulk of EM investable companies are found in the Far East, investors keep shunning Asia-focused funds, afraid as they are to miss out on outperformance in other emerging regions. Over the past five years, Asia ex-Japan equity funds have seen net outflows of €8.7bn, and fund selectors have tended to be more eager to increase their allocation to global EM equity instead according to Expert Investor data.

 et  equity fund flows in billion  ource orningstar Net EM equity fund flows in billion €. Source: Morningstar

It’s not true, however, that the fund selector preference for global within EM equities is perennial. In 2015, GEM equity funds suffered strong net outflows, and over the past three years Indian equity funds have actually been the most popular asset class in terms of inflows. Investors were attracted by the strong performance of the local stock market and economy. In 2015 and 2016, India’s GDP even grew faster than China’s.

But in 2016, with Indian equities turning volatile, interest turned to areas such as Latin America and Russia, whose equity markets were profiting from a rebound in commodity prices. Russian equities welcomed net inflows of €1.7bn from European investors over the past year, while Latin American equities saw net inflows of €1.1bn. However, over 3 and 5 years net fund flows for these regions are still strongly negative. 

As shown in the graph above, broad EM equity exposure looks like a safer bet on the long term than buying single country or regional funds. The latter make global emerging market equities look like a low-volatility asset class…  

A broader trend

Susanne Bolin-Gärtner, head of fund selection at Folksam Fondförsäkring in Stockholm, is one of these investors preferring funds with a broad mandate in emerging market equities, as she explained in a recent interview with Expert Investor. Picking funds that can allocate money more broadly and are as unconstrained as possible fits better with investing for the long-term, she contends.

This doesn’t only apply to EM equities though, but also to bond funds. The continuous popularity of unconstrained bond funds and, especially, absolute return funds is testament to that.