Fund investors sought stocks ahead of U.S. fiscal deal -EPFR

NEW YORK Fri Jan 4, 2013 1:56pm EST

NEW YORK Jan 4 (Reuters) - Investors poured $5.06 billion into stock funds worldwide in the latest week, as the appetite for risk rose after U.S. lawmakers cobbled together a last-minute tax deal that avoided the worst of the so-called fiscal cliff, data from EPFR Global showed on Friday.

Funds that hold emerging market stocks attracted $3.37 billion of the net $5.06 billion taken in by all stock funds in the week ended Jan. 2, the fund-tracking firm said. Funds that hold U.S. stocks, by comparison, attracted $706 million.

"Investors were optimistic that a deal would be reached," said Jack Ablin, chief investment officer of BMO Private Bank, referring to the U.S. budget deal. He added that going into the final week of 2012, emerging market stocks were generally seen as "insulated" from the "fiscal cliff" drama in Washington.

The EPFR reporting period coincided with Congress and President Barack Obama reaching a deal to raise taxes on the wealthiest U.S. citizens while postponing a series of sharp federal budget cuts for about two months.

Even though some believe U.S. lawmakers only postponed the tough decision of dealing with the federal deficit, U.S. stock markets rallied strongly after the deal and so-called safe assets like U.S. Treasuries have sold off mightily in the early days of 2013.

The benchmark S&P 500 stock index rose 3 percent over the reporting period. The benchmark 10-year Treasury yield, which ended 2012 at 1.76 percent, surged to 1.93 percent in Friday trading.

The move toward risk was seen in bond funds generally. For the fourth straight week, bond funds worldwide failed to gain as much new cash as stock funds, and pulled in $2.29 billion. Of that sum, U.S. bond funds took in just $336 million.

In an interview on Wednesday, Jeffrey Gundlach, chief investment officer and chief executive of DoubleLine Capital, said that weaker cumulative returns from bond funds this year are likely to drive money out of the funds.

"Returns are not likely to be as high, perhaps, as people naively expect them to be," Gundlach said, referring to bond funds' trailing 12-month performance. "Inflows into bonds are very likely to decline over the course of 2013 based upon this dynamic."

Flows into exchange-traded funds and products in the United States reached a record $1.35 trillion at the end of 2012, research and consultancy firm ETFGI said on Thursday.

European stock funds suffered outflows of $340 million after attracting $913 million the prior week as investors favored funds that hold European debt, which attracted $287 million in new money, EPFR global said.

In another sign that risk is back in fashion, high-yield "junk" bond funds gained $1.26 billion in new cash, the most in three weeks. Investors also targeted emerging market bonds and committed $1.28 billion to funds that hold them.

"As long as the Federal Reserve keeps a blanket over interest rates, high-yield should do pretty well," said Ablin of BMO Private Bank.

European bond funds attracted $287 million in new cash, a slightly weaker turnout than inflows of $343 million the prior week.

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