World investors turn neutral on U.S. stock funds: EPFR

NEW YORK Fri Feb 8, 2013 3:13pm EST

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NEW YORK (Reuters) - Fund investors worldwide turned neutral toward U.S. stocks in the latest week while pulling back sharply from high-yield "junk" bond funds, data from EPFR Global showed on Friday.

Funds that hold U.S. stocks had minor outflows of $16 million in the week ended February 6, the fund-tracking firm said, in sharp contrast to the prior week, when the funds pulled in $11 billion.

The latest period was the first week this year in which mom-and-pop investors pulled money out of U.S. stock funds. They removed roughly $300 million from the funds, EPFR Global said. Institutional investors balanced much of the redemptions with modest commitments to exchange-traded funds, the firm added.

Institutional investors and retail investors flocked to U.S. stock funds in the first and last weeks of January, when they gave more than $10 billion to the funds in each of the two weeks. The inflows have supported the stock market, which had its fastest start to the year in 16 years.

The appetite, or lack thereof, for equities serves as an important barometer of investor confidence and how people feel about the state of economic growth.

"There are still a lot of skeptics on the global recovery, and it's created some profit-taking," said Alan Lancz, president of investment advisory firm Alan B. Lancz & Associates, on the retail redemptions from U.S. stock funds.

All stock funds had inflows of $6.56 billion in the latest week, showing that world investors still took some risk. The appetite for risk in stocks did not apply to bonds, however, as funds that hold riskier high-yield corporate bonds suffered outflows of $1.33 billion. That was the biggest net redemption in 11 weeks, EPFR Global said.

"High-yield is overbought, and if bonds are selling off in general, high-yield is going to take a bit of a hit as well," said Tim Ghriskey, chief investment officer at Solaris Group in Bedford Hills, New York.

The rise in the 10-year Treasury yield to about two percent in recent weeks has been one indication of bond selling, Ghriskey said.

European stock funds had outflows of $264 million, their first redemptions over a weekly period this year. Investors continued to favor emerging markets and poured $3.42 billion into funds that hold those countries' stocks.

Bond funds worldwide pulled in just $1.08 billion in new money over the reporting period. The new cash stemmed from institutional investors making bets on bond ETFs, while retail investors pulled about $730 million from bond mutual funds, EPFR Global said.

Including the latest week, there have only been four weeks of retail redemptions from bond funds since the start of 2012, EPFR Global added.

"Interest rates have moved up in 2013, and this is the first time in years that they could show losses in bond mutual funds," said Lancz of Alan B. Lancz & Associates.

The potential performance losses among bond funds as a result of higher interest rates have scared off retail investors, Lancz added.

Funds that hold only U.S. bonds attracted a slight $472 million in new cash, which was less than a third of the gains they received the prior week.

The benchmark S&P 500 rose 0.7 percent over the period. The momentum of the rally carried over from January, when the index rose 5.1 percent, its best monthly gain since October of 2011.

Over the week, revisions to U.S. jobs data showing that employers added 127,000 more jobs in November and December than previously reported boosted sentiment.

Upbeat data on U.S. factory activity and the U.S. services sector also showed positive strides in the economy, while strong corporate earnings continued to drive investors into stocks.

The benchmark 10-year Treasury note fell in price to yield 2.03 percent at the close of trading on February 1 following the upbeat employment and manufacturing data.

On Friday, the 10-year note was yielding 1.96 percent.

Investors showed the same sentiment toward emerging market and European bonds as they did toward the countries' stocks. Emerging market bond funds attracted inflows of $1.27 billion, while investors pulled $804 million out of European bond funds in the latest week.

"They are still one of the few sources left of yield," said Rick Meckler, president of investment firm LibertyView Capital Management, on emerging market bonds.

(Reporting by Sam Forgione; Editing by Phil Berlowitz and Andrea Ricci)

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