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Credit rout puts fund-flow data under scrutiny
June 28, 2013 / 8:32 AM / 4 years ago

Credit rout puts fund-flow data under scrutiny

* Latest EPFR report shows record outflow from EM bond funds

* Portfolio managers watching for clues on redemptions

* Traders worry weekly snapshot paints distorted picture

By Neha D‘Silva

June 28 (IFR) - Asian portfolio managers are paying closer attention than ever to a weekly report on fund flows, wary that they risk being caught out in a growing wave of redemptions by emerging market investors.

One portfolio manager in Singapore said he had been raising cash preemptively after data from US-based research firm EPFR Global showed that money had begun to flow out of emerging market debt funds. Some traders believe the recent sell-off gathered pace since EPFR’s May 31 report showed outflows from the asset class for the first time in almost a year, prompting investors to raise cash to cover potential redemptions.

Few investors will trade on a single data point, but the weekly numbers have gained what some say is an outsized importance in a bearish market. EPFR surveys only one portion of the market, and some participants are questioning whether the data may be sending misleading signals.

“It’s a loose indicator for all of us. It’s a lagging indicator, it does not cover everything and it is a just litmus test for the rest of the market,” said a Singapore-based trader.

EPFR tracks redemptions and new allocations to emerging-markets dedicated funds that invest in equities and bonds, and its latest data paint a grim picture. Redemptions from funds dedicated to emerging market debt picked up pace, with outflows reaching US$5.578bn in the week ended June 26, twice the US$2.6bn registered the week before.

According to Morgan Stanley, the outflow was the biggest from mutual funds that invest in emerging market bonds since EPFR began keeping records. It also wiped out one third of the net inflows into such funds year-to date.

EPFR’s database of emerging market bond funds covers 2,409 funds managing US$260.66bn for its weekly report, according to its website. This includes funds that invest in both corporate and sovereign bonds in emerging markets.

According to an EPFR spokesperson, the data provider’s weekly report captures a little over 80% of the total universe of emerging market bond mutual funds, while its monthly reports capture around 95%.

The data, however, tracks a limited number of institutional investors, and its weighting towards mutual funds means the numbers may reflect retail investor movements rather than institutional ones.

Analysts estimate the total size of the emerging-market corporate bond market alone at more than US$1trn, four-fold the total under management of funds that respond to EPFR’s surveys.

“Insurance money, for instance, is stickier,” said one analyst in Hong Kong. “And most institutional investors will not start pulling out of EM at the first sign of correction.”


For nervous investors, however, the delayed weekly report is still one of the best indicators.

“It is indicative, but it’s the best we’ve got. In general, I assume when market is ‘normal’ it represents it quite closely. When the market is extreme (as it is now) I expect real figures to be bigger in either direction,” said a Hong Kong based portfolio manager.

For all the fear that the EPFR numbers have created recently, institutional investors have remained relatively cautious in their selling.

After all, they could face large losses if they liquidate their positions without needing to. “Liquidation so far has been orderly,” at least in the credit markets, a trader said.

In fact, after a month-long correction, many analysts are suggesting the market is cheap and are telling institutional investors it is time to buy. But whether or not they should be scooping up emerging market bonds is a dilemma for many as the outflow data gives little confidence.

“Are things looking oversold? Yes. You know things are getting cheaper,” said one trader. “It’s a whole falling knife analogy here. You don’t know when that bottom is going to be.”

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