The Cypriot banking crisis reminded investors that there remains no permanent fix to the eurozone’s woes, but investors continued putting fresh funds into most categories of mutual funds and ETFs. On the margins, however, they began to display a preference for domestic funds and fixed income products.
For an island nation with only 2.2 million people, generating a mere 0.2% of the GDP of the European Union, Cyprus has been punching above its weight in the last week, making a strong — and strongly negative — impression on global financial markets as it grapples with a fiscal and banking crisis. The country’s entire banking system has now been shut down for the best part of a week, and its politicians are frantically trying to devise a plan to rescue it from complete collapse, while avoiding what Cypriots feel is the draconian solution of taxing their bank accounts to pay for a bank sector bailout.
While the latest turmoil within the troubled eurozone may have rattled financial markets, equity mutual fund investors showed relatively few signs of unease: inflows totaled $3.44 billion in the week ended March 20, 2013, according to data released late yesterday by Lipper, a division of Thomson Reuters. Moreover, equity mutual fund investors divided their dollars relatively evenly between domestic funds, which attracted $1.59 billion of inflows and non-domestic funds, which pulled in some $1.85 billion.
But overall, combining fund flows data for both mutual funds and exchange-traded funds (ETFs) signals that U.S. investors seem to favor keeping their assets closer to home rather than entrusting them to the vagaries of overseas markets. Combined, inflows into mutual funds and ETFs saw $1.5 billion flow into domestic products while overseas funds attracted only $300 million. The $1.57 billion outflow from equity exchange-traded funds during the week was entirely driven by the decision by investors to sell non-domestic investment products; domestic ETFs saw their assets remain virtually unchanged for the five-day period.
In contrast, investors discovered a renewed enthusiasm for bonds, and taxable bond funds reported net inflows totaling a whopping $4.28 billion, making the week their second best of 2013 thus far. (Adding ETFs to the mix brought total inflows to $5.18 billion.) Funds in Lipper’s Loan Participation Funds category have been popular for many months, but shifted into high gear and attracted a net $1.41 billion of new assets last week, making it their best week on record.
In other fixed income markets, municipal bond funds suffered a third consecutive week of net outflows as investors withdrew an additional $240 million. Money market funds also experienced withdrawals, to the tune of $25.54 billion for the week, mostly as a result of selling by institutional investors that seems likely to be related to quarterly tax filings.