Fears that the Artificial Intelligence story has been pumped up to unsustainable levels dominated the third week of August, with the market value of AI-related stocks in the US dropping by an estimated $1 trillion. But investors who utilize mutual funds and ETFs sent a mildly contrarian signal. US Technology Sector Funds posted a modest inflow, as did Artificial Intelligence Funds which pushed their current inflow streak out to 14 straight weeks.
Investors seemed more concerned about the impact of any ceasefire between Russia and the Ukraine, and the impact that could have on Europe’s rearmament story which has been one of the catalysts for recent flows to Europe-mandated funds. During the week ending August 20, Europe Bond Funds snapped an inflow streak stretching back to mid-April, Europe Equity Funds posted their biggest outflow since early April and Aerospace and Defense Funds recorded their smallest inflow since the second week of February. Meanwhile, flows into Russia Equity Funds hit a nine-week high and Russia Bond Funds chalked up their biggest inflow since mid-3Q21.
Overall, the third week of August saw EPFR-tracked Bond Funds absorb another $23 billion while Equity Funds added $3 billion. Investors committed a net $1.2 billion to Money Market Funds and $1.1 billion to Alternative Funds while Balanced Funds recorded a collective outflow of $555 million.
At the single country and asset class fund levels, redemptions from mainland China and Brazil Money Market Funds climbed to 36 and 37-week highs, respectively, while Japan Money Market Funds tallied their biggest inflow since the third week of 2024. Flows into Municipal Bond Funds hit their highest level since EPFR started tracking them, Collateralized Loan Obligation (CLO) Bond Funds posted their 18th consecutive inflow and Physical Gold Funds chalked up their biggest outflow since the third week of May.
Emerging Markets Equity Funds
Solid flows to funds dedicated to mainland and greater China helped EPFR-tracked Emerging Markets Equity Funds post their first inflow of the month during the week ending August 20. Of the major groups by geographic mandate, only Latin America Equity Funds recorded an outflow for the week.
Behind the headline number, retail investors hit the exits for the 32nd time so far this year, Leveraged EM Equity Funds tallied their 13th outflow over the past 15 weeks and redemptions from EM Collective Investment Trusts (CITs) jumped to their highest level since mid-March. But funds with socially responsible (SRI) or environmental, social and governance (ESG) mandates saw flows climb to a five-week high.
Latin America Equity Funds recorded their sixth outflow over the past seven weeks, with Brazil-mandated funds the biggest contributor to the headline number. In addition to domestic issues – high interest rates, weak public finances, pre-election dynamics – sentiment towards Brazil has been hit by the trade friction between it and the US. That friction, which has already prompted the current US administration to slap 50% tariffs on many Brazilian exports, could get worse according to EPFR’s sister company CEIC.
In a recent note to clients, CEIC pointed out that, “India may be in [US President] Donald Trump’s crosshairs, but other major emerging economies have stepped up their purchases of discounted Russian crude since sanctions on Moscow kicked in during 2022. An analysis of international trade data using Harmonized System (HS) codes lets us zero in on the “mineral fuels” category, which includes crude oil. As our chart shows, Brazil stepped up its imports in mid-2023 [and] appears to be displacing US imports with Russian supply.”
India’s standoff with Trump continues to weigh on sentiment towards this market, with India-mandated funds extending their longest outflow streak since an 11-week run ended in mid-March. But funds dedicated to mainland China took in over $1 billion, Indonesia Equity Funds recorded their biggest inflow since the first week of March and Taiwan (POC) Equity Funds snapped their longest redemption streak in over six years.
EMEA Equity Funds extended an inflow streak stretching back to the second week of May despite Israels latest incursion into Gaza and the lack of tangible progress on a ceasefire between Russia and Ukraine. Flows at the country level favored oil producing countries, with Russia and United Arab Emirates Funds posting their biggest inflows in nine and 14 weeks, respectively, while Saudi Arabia Equity Funds racked up their 33rd consecutive inflow.
Developed Markets Equity Funds
In the current investment climate, a week is a long time for markets. The latest week saw expectations for artificial intelligence (AI) and future interest rate cuts take turns for the worse, taking significant lumps out of the previously high-flying US stock market. Investors with a developed markets focus largely stuck to their existing game plan, which favors diversified over single country exposure, and that was enough for EPFR-tracked Developed Markets Equity Funds to post their ninth collective inflow over the past 10 weeks.
Once again, Global Equity Funds posted above average inflows that took their year-to-date total past the $70 billion mark. Their full-year total in 2024 was $127 billion. In flow terms, Global ex-US Equity Funds are running neck-in-neck with their fully global counterparts.
US Equity Funds posted modest outflows, with redemptions from domestically domiciled funds offsetting solid flows into overseas-based funds. Leveraged US Equity Funds did post an inflow, their first since early July and biggest since the first week of April.
There was a wrinkle in the monthly number for US Equity Funds in July, which was released during the latest week. “During July, three Vanguard equity index collective investment trusts (CITs) converted from a fund of fund structure to a direct investment structure. These CITs no longer hold underlying Vanguard mutual funds and now directly invest in securities,” EPFR Director of Data Ian Wilson explains. “As a result, there are large outflows in July for several Vanguard funds. Since these are not true outflows and just the movement of security holdings from Vanguard’s mutual funds to their corresponding CITs, we have adjusted the starting assets of the involved CITs, to report offsetting inflows, which represent the in-kind purchases of the underlying securities.”
Europe Equity Funds posted their biggest outflow in over four months as investors wrestled with the implications of a Russia-Ukraine peace deal on demand for military supplies and safe-haven assets. Redemptions from Germany and Switzerland Equity Funds hit nine-week and 17-year highs, respectively, and over $1 billion flowed out of UK Equity Funds as the latest inflation data showed price growth running at nearly double the Bank of England’s target rate.
Investors pulled more money out of Japan Equity Funds, thereby extending that groups longest run of outflows since 3Q22, despite the country’s benchmark equities index hitting a new record high. The longer-term outlook is clouded by the weakness of the current minority government and growing concerns about the country’s fiscal deficits.
Global sector, Industry and Precious Metals Funds
The total trading volume (the sum of the absolute values of each flow) across the 11 major EPFR-tracked Sector Fund groups came in just shy of $2.5 billion during the third week of August, the lowest total since early 2023. Lower trading volumes are often linked to sharper negative market moves, and this week’s slowdown reflected caution ahead of Fed Chair Jerome Powell’s scheduled speech at the Davos summit and the correction in Artificial Intelligence-related stocks.
Looking at flows into sector-oriented benchmarks, Technology Sector Funds tracking the Hang Seng Tech index took in over $1.5 billion and another $1.5 billion combined flowed into funds tracking the S&P North American Technology Sector and the CSI Hong Kong Connect Internet index. However, half of that was offset by redemptions from funds tracking the SSE Science & Technology Innovation Board 50 index.
All Equity Funds benchmarked to the S&P 500 Index saw outflows of $3.2 billion, their first redemption in three weeks and only the third since mid-June. Technology Sector Funds tracking the S&P 500 snapped a 13-week inflow streak with their largest outflow since early 2006, accounting for 30% of the total S&P 500-linked redemptions. Leveraged 2x funds tracking the stock price of Palantir, MicroStrategy and Tesla all featured in the top benchmarks with inflows this week.
Funds dedicated to precious metals had a mixed week. Silver Mining Funds brought in their eighth consecutive weekly inflow, and 11th of the past 12 weeks. A net $1.05 billion has flowed into the group since the start of June (12 weeks). Physical Silver Funds also saw inflows which hit a four-week high at $315 million. But redemptions from Physical Gold Funds hit a 12-week high.
Bond and other Fixed Income Funds
The week ending August 20 saw another $23 billion flow into EPFR-tracked Bond Funds as investors continue gravitating to the relatively predictable dynamics and yields offered by fixed income assets. Funds with corporate mandates have outgained their sovereign counterparts year-to-date and funds with mixed sovereign/corporate mandates have taken in more money than the other two combined.
During the latest week, Emerging Markets Bond Funds pulled in over $3 billion as they chalked up their 18th consecutive inflow, US Bond Funds posted their fourth-largest weekly inflow so far this year and Asia Pacific Bond Funds extended their best run in over a decade. Europe Bond Funds, however, narrowly failed to extend their current inflow streak.
At the asset class level, Municipal Bond Funds posted a new inflow record, Total Return Funds posted their biggest inflow in over 11 months and Mortgage Backed Bond Funds chalked up their 17th straight inflow while Bond Funds with socially responsible (SRI) or environmental, social and governance (ESG) mandates tallied only their second outflow since the final week of April.
Emerging Markets Bond Funds again benefited from solid retail support as Asia ex-Japan Country Fund groups and the diversified Global Emerging Markets (GEM) Bond Funds again drove the headline number. In the case of the GEM Bond Funds, the latest inflow was the biggest since early 2023.
Funds dedicated to the less investible developing markets are also attracting fresh money. The latest inflow to Frontier Markets Bond Funds was the seventh in a row and 12th over the past 14 weeks. The current top 10 single country allocations for the group are, from biggest to smallest, Nigeria, Egypt, Pakistan, Ghana, Zambia, Angola, Uzbekistan, Ukraine, Kyrgyzstan and Argentina.
Behind the modest outflow recorded by Europe Bond Funds was another week of solid flows into Europe ex-UK Regional Bond Funds that was offset by redemptions from single market groups headed by Switzerland Bond Funds.
Among the major US Bond Fund sub-groups, only Long Term Sovereign Funds posted an outflow during a week when expectations of another cut in short term interest rates next month were dented by the latest inflation data. Inflation Protected Bond Funds recorded their 13th inflow over the past 16 weeks but US High Yield Bond Funds posted their first collective outflow since the third week of April.
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