Fund investors sour on emerging market, U.S. stocks - EPFR

By Sam Forgione

NEW YORK (Reuters) - Fund investors worldwide soured on emerging market stocks for the first time in over five months and opted for U.S. bonds in the latest week as global concerns shook markets, data from EPFR Global showed on Friday.

Investors pulled $1.07 billion from emerging market stock funds in the week ended February 27, the fund-tracking firm said. Those were the first outflows from the funds since early September, the firm added.

Demand for stock funds worldwide weakened somewhat in February following strong inflows in January. Stock funds had inflows of $18.15 billion in the four weeks of February, far lower than inflows of $47.8 billion in January.

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.

"The U.S. has slowed down, the euro zone is in a recession, and I think that has created a lot of caution," said Alan Gayle, senior investment strategist at RidgeWorth Investments.

Funds that hold U.S. stocks also saw a drop in demand as investors redeemed $411 million from the funds. That marked a reversal from the prior week's inflows of $2.24 billion.

The outflows from emerging market and U.S. stock funds were a result of institutional investors yanking money out of ETFs, said Cameron Brandt, director of research at EPFR Global.

Mom-and-pop investors did, however, pull a minor amount of cash from all stock funds for the first time in seven weeks, Brandt added.

The pullback from emerging market and U.S. stock funds led to net inflows of just $1.2 billion into stock funds worldwide, the weakest turnout for the funds since investors redeemed in mid-November of last year.

Funds that hold a variety of global stocks took in over $2 billion in new cash, accounting for most of the net inflows into stock funds. Funds that hold Japanese stocks also had a strong week with inflows of $625 million.

Investors also pulled $4.23 billion from commodities sector funds. Gold and precious metals funds accounted for over $4 billion of those outflows, with a major chunk leaving a single gold ETF.

Brandt of EPFR Global was not immediately available to comment on which gold ETF had outflows. The world's largest gold-backed ETF is the SPDR Gold Trust .

Billionaire hedge fund manager John Paulson, the founder and head of Paulson & Co., is the largest stakeholder in the fund, according to regulatory filings as of the fourth quarter of 2012. Paulson's holding in the fund topped 5 percent.

A spokesman for Paulson's firm did not return a request for comment on the selloff in the unidentified gold ETF.

The benchmark S&P 500 rose just 0.27 percent over the reporting period. Federal Reserve Chairman Ben Bernanke reassured investors that the central bank would continue its monetary stimulus program on February 26, leading to a jump in U.S. stock markets.

Uncertainty surrounding the outcome of the Italian elections stoked concerns over the euro zone debt crisis, however, while U.S. President Barack Obama and Congress remained deadlocked over how to prevent $85 billion in automatic government spending cuts from taking effect on March 1.

The yield on the benchmark 10-year Treasury fell to 1.98 percent on February 21 after hovering around 2 percent following reports of a downturn in euro zone business activity. U.S. unemployment and manufacturing data also pointed to slow growth.

The safe-haven bond has since gained more demand. Its yield stood at 1.85 percent in intraday trading Friday as impending U.S. budget cuts and concern about economic weakness in Europe led investors to seek the U.S. debt.

Despite political and economic concerns in the euro zone, funds that hold European stocks had inflows of $164 million over the week.

Bond funds benefited from the light demand for stock funds. Funds that hold U.S. bonds attracted $3 billion in new cash, the most since mid-January and accounting for a large chunk of the $4.68 billion into bond funds worldwide.

"I don't think anybody expects interest rates to go up that quickly, and people are comfortable in bond funds," said Rex Macey, chief investment officer at Wilmington Trust Investment Advisors.

Like their stock counterparts, emerging market bond funds saw a drop in demand with just $684 million flowing into the funds, the least since late December of last year.

High-yield "junk" bond funds attracted $287 million in new money, up from the prior week's inflows of $135 million and marking the second straight week of inflows into the funds. The recent inflows marked a rebound from outflows in the first two weeks of February.

(Reporting by Sam Forgione; Editing by Andrew Hay and James Dalgleish)