July 28, 2017

Investors Flock to Emerging Markets Funds

by Patrick Keon

Funds (including both mutual funds and ETFs) in the Thomson Reuters Lipper Emerging Markets Funds peer group have taken in over $26.8 billion of net new money for the year to date. This number puts the group on pace to have its second largest annual net inflows ever, behind only the $54.1 billion of net positive flows for 2010. The Emerging Markets Funds group has had a net inflow every month of 2017, peaking at $5.8 billion for June. The group is on track to bring in approximately $4.0 billion of net new money for July.

There are several reasons emerging markets funds have done well this year from a fund-flows perspective, the most prominent being stronger corporate earnings and a weaker U.S. dollar. A strong or appreciating U.S. dollar is not good for emerging-market stocks, and this year we’ve had just the opposite; the Trade Weighted U.S. Dollar Index (DTWEXM) has fallen from 95.76 at the end of 2016 to 88.64 as of July 21. This index measures the value of the U.S. dollar against a basket of currencies of the U.S.’s major trading partners. A stronger U.S. dollar is a negative for emerging markets because it reduces earnings and takes liquidity out of the markets. Corporate earnings for emerging-market companies began to slip after 2012, but they have bounced back over the last year, with earnings in general beating expectations. This trend can be seen in the graph below: Fund flows dropped in 2013 and eventually bottomed out with a net outflow for 2015 before starting an upward trend in 2016.

At the individual fund level the positive net inflows have been heavily concentrated. The two largest individual positive flows account for over 66% of the $26.8 billion of net inflows for the group, and the ten largest individual net inflows comprise just over 100% (+$26.9 billion) of the total. iShares Core MSCI Emerging Markets ETF (IEMG) and Vanguard FTSE Emerging Markets Fund ETF (VWO) have taken in $10.9 billion (40.6%) and $6.9 billion (25.8%), respectively. The next eight largest positive net flows total $9.1 billion from six mutual funds and two ETFs. Of this group DFA Emerging Markets Core Equity Portfolio has recorded the largest net inflow at $2.3 billion. On the negative side the largest net outflow for the year belongs to Fidelity Series Emerging Markets Fund, which has had approximately $1.5 billion leave its coffers.

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