It seems like hardly a week can go by without the Financial Times or the Wall Street Journal talking about investors continuing unadulterated enthusiasm for European equity funds as the potential for fiscal tightening here at home runs counter to the ECB’s quantitative easing program to stimulate growth and fight the prospect of deflation. Hedged or unhedged doesn’t seem to matter as the ETFG Fund Flows report shows over $4 billion has found its way into the European Equity ETF market over the last 30 days compared to the nearly $12 billion that has leeched out of domestic equity ETF’s. But while the inflows into Europe have been impressive, Europe continues to lag behind the Asian-Pacific markets that pulled in over $5.32 billion in the same time period and perhaps even more surprisingly, the bulk of the money isn’t finding its way to China.
Despite the hype surrounding the strong performance of the China A-share market (or possibly because of it) the biggest asset gatherers in ETFG’s “Asia-Pacific” category are about as far removed from the red-hot Shanghai exchange as you can possibly be while still within a three-hour flight time. Formerly most hated international market Japan continues to be the biggest gatherer in 2015 with over $4.3 of the $5.32 billion that’s flowed into the space going to just two funds, old stalwart iShares MSCI Japan ETF (EWJ) and WisdomTree Japan Hedged Equity Fund (DXJ.) DXJ’s hedged currency exposure is one of the few differences between the funds although the impact on performance has been negligible in 2015 with DXJ up 12.72% compared to 13.26% for slightly larger rival EWJ as the U.S. dollar so far has held onto most of its 2014 gains versus the yen. Investors doing a deeper dive into the funds for clues on which way the “smart money” is leaning are likely to be disappointed; both funds are focused on the large cap market with DXJ having a more value/blend leaning towards EWJ’s solid large blend focus and consequently leading to large cross holdings between the funds. Both funds also have among the lowest ETFG Red Diamond Risk ratings thanks to low volatility and country risk and even the inflows are nearly identical over the last month.
While the developed and larger emerging market nations in Asia might be holding their own, the smaller frontier markets that saw massive investor inflows during the QE era are quickly losing ground. Among the biggest losers in terms of percentage of assets are the Market Vectors Vietnam ETF (VNM) and iShares MSCI Thailand Capped ETF (THD) with outflows of $63 and $75 million respectively. Both nations benefited strongly from the “anywhere but Europe” mentality of the last few years with THD outperforming the iShares Emerging Market ETF (EEM) five out of the last six years while VNM became an investor darling after outperforming EEM by 700 basis points in 2012. But the potential for Fed rate hikes later this year has put both nation’s currencies (and consequently stock markets) under pressure as investors bring their capital home. Vietnam has already devalued the dong once this year as the rising dollar crimped the country’s strong export growth although the depreciation risks raising inflation closer to the Central Banks targeted rate of 5% and has led to a large outflow by foreign investors. And while the Thai Baht was one of the few currencies to hold its ground versus the dollar over the last year, a surprise rate cut earlier this month led to serious outflows from the Thai credit market.
The prospect of a rising dollar may continue to drag on frontier performance, but one of the biggest winners in the war for investor dollars (at least in percentage terms) is a small fund that offers investors exposure to two of last year’s bigger losers in the currency wars. The relatively tiny Wisdom Tree Australia & New Zealand Debt Fund (AUNZ) tsaw a remarkable inflow of 225% last month to bring its AUM to over $78 million. Initially launched in 2008 as the WisdomTree Dreyfus New Zealand Dollar Fund (BNZ) and later refocused in 2011 to include Australian debt, the fund actively rotates between what the managers consider to be three “sectors” or government debt, semigovernment (state and local debt) and debt issued by supernational agencies with a focus on generating income and most importantly to the new investors, capital appreciation due to changes in exchange rates. With the Australian and New Zealand dollars down 21.6% and 15.82% respectively since last July and only one fund currently offering non-levered exposure to the Australian dollar, AUNZ has found a role in the portfolios of investors looking for alternate means to express their opinion that the U.S. dollar has risen too far too quickly.
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