Record Outflow From Money Market Funds in Week

NEW YORK -- Investors pulled a record $32.4 billion in cash out of money market mutual funds in the week ended April 30, according to data from fund tracker EPFR Global; however where it went is still a big question.

Markets have benefited in the last week or so from rising hope among investors that the worst of the credit crisis may have passed, fueling some optimism for riskier asset classes.

In the latest week, the data showed large redemptions from Western Europe, U.S. and sector funds, while equity funds tailored toward higher risk areas gained ground.

"Overall I think the data is mixed but there is a bias toward a more bullish outlook given the inflows that occurred went into the fund groups geared to riskier assets such as emerging market equities, technology and high-yield debt funds," said Cameron Brandt, global markets analyst at Boston-based EPFR Global.

"(Money markets funds) had not really been deployed as of Wednesday evening," he said.

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Dedicated long-only emerging market equity funds took in $2.9 billion in fresh cash last week. However, for the week, the Morgan Stanley Capital International emerging market stock index was nearly unchanged, down just 0.57 points.

The other big equity-fund sector winner was Asia ex-Japan, which took in $1.4 billion in fresh cash. Latin American and EMEA (Europe, Middle East, and Africa) funds had net inflows.

But that is where the good news stopped.

German equity funds, big winners in the prior week suffered an even greater outflow of cash in the latest reading, but for reasons not entirely clear. German funds had net outflows of $4.4 billion in the latest week versus a $3.9 billion inflow in the prior period.

"Germany? I am treating that with a little bit of scepticism because there has been a series of large deposits but then some equally large outflows," said Brandt, who added "The underlying trend for Europe is still pretty hostile."

Western European equity funds, largely as a result of outflows from Germany, suffered $5 billion in redemptions.

U.S. equity funds also suffered outflows, losing $2.8 billion to redemptions, most of which were due to a $2.5 billion outflow of cash from large-cap funds.

Globally, energy sector fund redemptions totaled a net $886 million.

DEBT FUNDS

On the debt side, high-yield bond funds took in cash while dollar-denominated emerging market debt funds had redemptions, overshadowing cash inflows into local-currency bond funds.

Dedicated high-yield bond funds took in a net $533.5 million compared to net redemptions of $62.8 million from total emerging market bond funds.

"Dedicated high-yield funds saw increased flows as investors sought to benefit from the strong market rally," ING global head of emerging market strategy David Spegel wrote, adding high-yield funds may be drawing funds away from emerging markets.

Dollar-denominated emerging market debt funds suffered a net outflow of $94.1 million versus a net inflow of $50.5 million into local-currency bond funds. Blended funds had net outflows of $19.2 million.

"That may reflect lower demand for a U.S. dollar hedge," Spegel wrote regarding the drop in demand for local-currency bond funds.

U.S. bond funds had net outflows of $159.8 million. U.S. municipal bond funds took in a net $157.4 million, reflecting sustained investor demand for this sector of the market.

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